Mediterranean fast-casual restaurant chain Cava Group (CAVA -1.82%) is often seen as the next Chipotle Mexican Grill (CMG -1.12%) due to its impressive growth opportunities and the potential upside it possesses. This year, Cava has been generating stronger returns for investors, with its share price up over 227% entering trading on Tuesday, versus just 32% gains for Chipotle.
With Cava posting far more impressive results than Chipotle of late, has it already become the better growth stock to own?
How the companies compare on revenue growth
A key metric in evaluating growth stocks is inevitably going to be the year-over-year revenue growth a business generates. And Cava has been accumulating the much stronger results in recent quarters, with its sales typically well up over 20%.
CMG Operating Revenue (Quarterly YoY Growth) data by YCharts
It is, however, important to note that while Cava is indeed growing at a much faster rate, it's also a much smaller business than Chipotle, with the latter generating $2.8 billion in revenue in its most recent quarter (which ended on Sept. 30) -- that's more than 11 times the $244 million that Cava posted in sales in its last quarter, which covered a similar time frame.
Going up against smaller numbers, it's easier for Cava to generate higher growth rates than Chipotle. Plus, with a smaller footprint (352 restaurants versus more than 3,600), there are more opportunities for Cava to expand its presence around the world than there will be for Chipotle, especially in fast-growing markets.
This is a good example of how context is important when comparing growth rates because smaller businesses can oftentimes seem more attractive as they are growing faster, but it's also much more difficult for a larger, more established business to produce the same type of growth.
Chipotle has an advantage in terms of profitability
While Cava Group is growing sales at a faster rate than Chipotle, one area where it's still lagging behind is on the bottom line. Having strong profit margins can be key in ensuring that as the business scales and grows, so too do earnings.
And as earnings numbers rise, that can improve a company's valuation as its price-to-earnings multiple will come down, which can attract not just growth investors but value investors as well.
CMG Profit Margin (Quarterly) data by YCharts
Cava's profit margin has improved significantly in recent quarters and that's a development that investors will want to keep an eye on. If the gap in the chart above continues to shrink and its margins get better, that's an excellent sign the business is scaling in an efficient manner, which can make Cava a more attractive growth stock to own.
Is Cava Group a better growth stock than Chipotle?
Cava is a much smaller company than Chipotle but it has been amassing some impressive results in recent quarters. While it has been performing better in terms of year-over-year revenue growth, it has an advantage in being able to focus on high-growth areas and markets to expand into. Chipotle, meanwhile, has to be more selective in deciding where to expand to avoid potentially cannibalizing existing store sales due to its larger presence. Ignoring those details could falsely make it appear as though Cava is a much better growth stock when in reality, its smaller size plays to its advantage.
Chipotle is a far more profitable company and it's trading at 56 times its trailing earnings compared with a multiple of more than 340 for Cava Group. Both of these restaurant stocks can potentially make for solid long-term investments but I'd argue that Chipotle's results are more impressive given its much larger and more established market presence. And at a more reasonable valuation, it may be the better buy at this stage.
