Have you heard of the restaurant chain? Kava (NYSE: CAVA)If you're not, don't worry. Most people aren't. With just 323 stores open, the company is still relatively unknown to the public, and neither is its stock.
But as any seasoned investor will attest, good things often come in small packages, which means the right small-cap stocks can deliver big gains. Cava Group could be one such stock.
Here are four key reasons why you should consider buying Cava shares before the share price rises further.
1. The Mediterranean diet is popular
Consumer taste preferences have always changed over time. Burgers were the foundation of quick-service restaurant chains, then Mexican and Tex-Mex came along. Asian cuisine remains in high demand as well. The only constant in the restaurant industry is that consumers eventually want something different, something new.
Enter Cava Group.
While Mediterranean cuisine isn't entirely new to the North American market, it's still relatively unknown, but demand has never been greater than it is now, as younger consumers are open to new tastes and are eager to pass on their adventurous tastes to their children.
It's not just a desire for something different that's driving this interest: People are becoming more health-conscious than ever before, especially when it comes to what they eat. The Mediterranean diet is at the core of a diet now strongly recommended by health care organizations, including the Mayo Clinic, the Cleveland Clinic and the American Heart Association. These groups tout the Mediterranean diet as being low in fat and sugar, and in some cases helping to lower cholesterol and improve brain health.
In other words, the demand for Mediterranean food is likely to continue.
2. The company is growing and will continue to grow
This demand is evident in the company's growing store count and associated revenue growth.
Take first quarter sales as an example. Revenue was $256.3 million, up 30% year over year. The opening of 14 new restaurants during the period certainly helped drive this increase, but it wasn't the only reason for it. Comparable store sales also increased 2.3%. While that's not a huge number in absolute terms, it's a big win when you consider the very tough comparisons to the previous year. Last quarter, comparable store sales increased nearly 31% compared to the same period two years ago.
But this is just the beginning: Kava Group plans to open 50 to 54 new restaurants in fiscal 2024 and accelerate same-store sales growth to 4.5% to 6.5%. The company hasn't provided guidance beyond 2024, but analysts see sales growing from $876 million this year to $1.64 billion in 2028.
3. Management is focused on cost efficiency
Many startups seem so focused on expanding their reach that they don't seem to care about making a profit. In fact, many don't care about making a profit at all, choosing to use whatever it takes to achieve the revenue and market share they desire.
But Cava Group is different. Its management team understands the value of remaining profitable, even in the midst of a period of high growth.
Take, for example, the company's recent decision to increase production of its dips and spreads in-house. While building a 55,000-square-foot facility in Virginia would obviously be costly, this solution would benefit Cava's growth plans in the long run. Ultimately, it would be cheaper to produce in-house than to outsource production to a third party. And by controlling the operation in-house, Cava can be sure they get the products they want.
Of course, the facility is only a small part of Cava's operations, but it highlights the careful attention the company's management is paying to allocating resources.
4. Kava is already profitable
Finally, it's worth noting that Cava Group is already profitable — and not just a little: Last quarter, it turned about 13% of its revenue into earnings before interest, taxes, depreciation, and amortization (EBITDA), and just over 5% of its sales into net income. By tech stock standards, that may not be the highest margins, but it's impressive for a fast-growing restaurant chain.
Restaurant-level profit margins remain just above 25%, with corporate-level spending eating into the remaining profits, but even this spending is likely to remain relatively low compared to the incremental revenues from future restaurant openings.
In other words, the company's profit margins will expand over time, and the reason this supports a bullish argument at the moment is that few companies of Cava's size and history can become this profitable so quickly.
Kava stock is a high-risk, high-reward investment
Still, it's not an ideal choice for everyone. The shares are expensive, and no matter how well-selling the menu is, the restaurant business is volatile. This only adds risk to the equation, or at the very least, potential volatility. If you want relatively stable value for your portfolio, look elsewhere.
But for investors with a tolerance for risk and who can stomach that kind of volatility, Cava stock is an attractive prospect, even below the current share price, with an analyst consensus price target of around $82. We'll be keeping an eye on the story side of this story stock, which is likely to get better going forward.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
The post 4 Reasons You Should Buy Kava Stock Like There's No Tomorrow was originally published by The Motley Fool.
