Is Cava Group a better growing stock than Chipotle Mexican Grill?

Mediterranean fast-casual restaurant chain Cava Group (HOW ARE YOU 4.06%) is often considered the next Chipotle Mexican Grill (CMG 4.84%) due to its impressive growth opportunities and upside potential it possesses. This year, Cava stock has generated higher returns for investors, with the stock price up more than 227% as of Tuesday’s IPO, compared to just 32% for Chipotle stock.

While Cava has posted much more impressive results than Chipotle lately, has it already become the best growth stock to own?

How Companies Compare in Revenue Growth

A key metric in evaluating growth stocks will inevitably be the year-over-year revenue growth generated by a company. Cava has racked up much better results in recent quarters, with sales generally up more than 20%.

CMG operating revenue data (quarterly growth YoY) by YCharts.

However, it’s important to note that while Cava is indeed growing much faster, it is also a much smaller company than Chipotle. The latter generated $2.8 billion in revenue during its most recent quarter (which ended September 30). That’s more than 11 times the $244 million in sales Cava recorded in its most recent quarter, which covered a similar period.

As it runs into smaller numbers, it’s easier for Cava to generate higher growth rates than Chipotle. Additionally, with a smaller footprint (352 restaurants versus more than 3,600), Cava will have greater opportunities to expand its presence globally than for Chipotle, especially in fast-growing markets.

This is a good example of the importance of context when comparing growth rates. Smaller businesses can often seem more attractive because they are growing faster, but it is also more difficult for a larger company to produce the same type of results.

Chipotle has a profitability advantage

Although Cava Group is growing sales at a faster rate than Chipotle, one area where it still lags is in financial results. Having strong profit margins can be key to ensuring that as the business scales and grows, so do profits.

As profits increase, it can improve a company’s valuation. Its price-to-earnings multiple will decline, which may attract not only growth investors, but also value investors.

CMG Profit Margin Data (Quarterly) by YCharts.

Cava’s profit margin has improved significantly in recent quarters, and that’s a development investors will want to watch. If the gap in the chart above continues to narrow and its margins improve, that’s a great sign that the company is scaling efficiently, which can make Cava a better growth stock to own .

Why I would always choose Chipotle over Cava Group

Cava is a much smaller company than Chipotle, but it has racked up impressive results in recent quarters. Although it has performed better in terms of year-over-year revenue growth, it has the advantage of being able to focus on high-growth areas and markets in which to expand. Chipotle, meanwhile, needs to be more selective in choosing expansion areas to avoid cannibalizing sales from existing stores due to its larger presence. Ignoring these details could falsely give the impression that Cava is a much better growing stock, when in reality its smaller size works to its advantage.

Chipotle is a much more profitable company, and it trades at 56 times current earnings, compared to a multiple of more than 340 for Cava Group. Both of these restaurant stocks have the potential to be solid long-term investments, but I would argue that Chipotle’s results are more impressive given its much larger and more established market presence. And at a lower valuation, it seems like the best buy at this point.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool posts and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: Short December 2024, $54 at Chipotle Mexican Grill. The Motley Fool has a disclosure policy.