BROS Operating Revenue (Quarterly YoY Growth) data by YCharts
For long-term investors, Dutch Bros may be seen as following a path similar to Starbucks, with the coffee giant boasting over 18,000 stores across North America. On the other hand, Cava is likened to Chipotle Mexican Grill, a niche food brand aiming for 7,000 locations in North America.
Both Starbucks and Chipotle have proven to be lucrative investments over time. Cava’s financial performance suggests potential for share repurchases in the future. With strong organic same-store growth contributing to positive cash flow, Cava has $43 million in free cash flow over the past four quarters from $913 million in revenue. In contrast, Dutch Bros recorded nearly $1.2 billion in revenue but experienced a cash burn of $10 million.
Cava has the advantage of funding new stores internally, owning all its locations and covering the costs of opening and running them. The company’s profitability is evident from its cash flow, contributing to a solid balance sheet with $367 million in cash and no debt. Dutch Bros, while also holding substantial cash reserves ($281 million), carries $240 million in long-term debt.
In the near future, Cava may initiate share repurchases, mirroring Chipotle’s strategy, to support store expansion and enhance earnings per share and stock price growth.
Although Cava appears to be the stronger business currently, its lofty valuation is a point of concern. Despite its impressive same-store sales growth, expansion potential, strong cash flow, and solid balance sheet, Cava’s high price-to-earnings ratio of 240 raises valuation issues. Dutch Bros, with a P/E ratio of 172 and projected 35% annualized earnings growth, faces similar valuation challenges.
Using the PEG ratio to evaluate valuation relative to growth, Cava commands a higher premium (8.0 PEG ratio) compared to Dutch Bros (4.9).
Considering the current circumstances, Dutch Bros seems to be the more attractive investment option. If Cava’s valuation adjusts to a more reasonable level, investors may find it a compelling opportunity in the future. Remember, even exceptional companies can be lackluster stocks if their prices are inflated.
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Disclosure: The Motley Fool may have positions in and endorse shares of Chipotle Mexican Grill and Starbucks. Additionally, The Motley Fool suggests Cava Group and Dutch Bros, along with recommending short December 2024 $54 puts on Chipotle Mexican Grill. For further information, please refer to The Motley Fool’s disclosure policy.
