Best Restaurant Stock to Buy: Cava Stock vs. Chipotle Stock

The restaurant industry is undergoing unprecedented change. On the one side, you've got weight loss treatments, decreasing personal disposable income, and significantly increasing wages. That's making it more difficult and putting pressure on the restaurant industry overall. On the other side, you've got technological advancements that are improving the competitive position for certain restaurant companies, including the rise of food delivery networks, increasing digital ordering, and artificial intelligence at the drive-thru window. Now, for now, it's leading to decreasing sales, decreasing visitation, as the downsides are outweighing the upsides in the restaurant industry. But longer term, I feel the upsides could catch up and provide a significant tailwind to the industry overall. So, I'm looking at a few restaurant companies for my portfolio. And two of the companies that are near the top of my list are Chipotle and Cava. I wanted to compare these two to understand which one makes a better investment at current prices. >> I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parkev for the 10 best stocks to buy now. >> So, the first thing I wanted to compare these two on is revenue growth and size. Looking at this, I can see Chipotle is roughly 10 times the size of Cava Group, generating $12.1 billion in trailing 12-month revenue, compared to $1.28 billion for Cava Group. But looking forward, Cava Group is expected to generate and is generating roughly twice the growth rate compared to Chipotle. It's opening more locations, and each location is growing comparable sales faster than Chipotle. I should say, it's growing more locations on a percentage basis compared to Chipotle, but not in overall basis compared to Chipotle. Now, speaking of looking forward, the revenue growth rates that are expected out of Chipotle over these next 3 years are in the high single digits to low double digits. For 2026, the analysts expect 9% revenue growth for Chipotle, and then two consecutive years of roughly 11% revenue growth. Those are solid rates of increase for a restaurant company. But, Cava Group is expected to grow much faster than that at 27% in 2026, followed by two consecutive years at roughly 21%. So, roughly double or more than double the revenue growth rate coming out of Cava compared to Chipotle, and that's understandable. It's smaller. It's got more room for expansion. It's less saturated in markets, so it can grow more quickly, at least in the near term until it grows to relatively proportional to the size of Chipotle. The next factor I wanted to compare these two on is their operating profit margins, and Chipotle has the advantage in this category, but Cava, again, is making the better progress. Chipotle's operating profit margin has been flat going back to 2013. It's fluctuated, it increased, and then is now coming back down at 15.93% in the most recent trailing 12-month period. That's compared with Cava Group with a 7.1% operating margin, but that margin has been improving dramatically. And if Cava Group grows at the rates of increase that Wall Street expects, I wouldn't be surprised if over the next 3 years Cava's operating profit margin is in the mid double digits, roughly around where Chipotle is today, Maybe a little bit lower, maybe 13% would be a more reasonable estimate over the next 3 years for Cava's operating profit margin. The other metric I wanted to compare these two on is the return on invested capital. Given that these are both primarily corporation operated restaurants, they're not on the franchisee business model like the McDonald's and Domino's are heavily franchised. These two are not as heavily franchised as the other two. And so, their capital investment and return on invested capital is more important. And Chipotle at 18% has been improving this metric, and the metric is above its weighted average cost of capital, so it is adding value to shareholders. It's an effective allocator of capital. Cava Group, meanwhile, at just 5% is not yet adding value to shareholders at this level, but it's been improving significantly from negative 12% up to 5.06%. The company still needs to grow larger to benefit from economies in scale. And, you know, infrastructure costs can be spread out across more locations. You think about you've got fixed expenses that are not likely to increase by as much as the company adds incrementally more locations. You think about the company's headquarters, you think about payments for the board of directors, the CEO, senior management, you think about legal expenses, accounting expenses, marketing, etc. Those are not likely to increase proportionally as they add more locations, as they add more revenue. Of course, those expenses will increase as the company grows, but at a smaller percentage compared to the overall revenue growth, leading to that expanding return on invested capital. So, now that we looked at performance, I want to look at valuation. And Cava Group is trading at a significantly more expensive valuation at a forward price to earnings of 123 compared to Chipotle which is trading at a forward price to earnings of 30. So, on a forward PE multiple, Chipotle looks significantly cheaper. But, when we look at the discounted cash flow valuation, Chipotle looks more expensive at $33 per share. It's above the fair value I calculated at $28 per share. Meanwhile, Cava Group at $68 per share is below the fair value I calculated at $78 per share. So, while these two look interesting and attractive, if I had to pick one of them today, I would probably pick Cava Group. I'm attracted in their faster growth rate. I'm attracted to the better valuation on a discounted cash flow basis. And the Mediterranean food category is a lot less saturated than the Mexican food category. And so, I see a lot of room and opportunity for Cava Group to expand. And I'd be more optimistic here on Cava Group. But, I'm curious to know what you think. Which one do you think makes a better buy?