Cava vs. Wingstop a Food Fight Comparison

Overview

Fast casual dining is one of the most prominent aspects of American life, but often overlooked when it comes to securities. Two key companies in this space are CAVA Group (NYSE: CAVA) and Wingstop Inc (NASDAQ: WING), both a part of the consumer cyclical sector in the restaurant industry. 

CAVA ($56.91 at close), founded in 2006, operates chain restaurants across the United States, focused on providing a variety of customizable Mediterranean dishes. The company has over 400 locations across the country, with long term goals of expanding further. The majority of their revenue comes from their restaurant operations, but they also generate revenue through consumer packaged goods. Some of their items, such as hummus, are sold throughout US grocery stores. Wingstop ($259.20 at close), founded in 1994, on the other hand, operates and franchises chain restaurants with a focus on chicken dishes, such as wings, tenders, or sandwiches. The company has a more global reach than CAVA, with global locations in areas such as Australia and the Middle East, but the majority of their revenue stems from the United States.

Financials

To gauge a comparison between the two, it is important to examine their enterprise value (EV). EV is an indicator of a company’s overall worth. It is calculated by adding market capitalization to debt and then subtracting cash/cash equivalents. By assessing overall value, EV serves as an important comparison between companies with varying business models and capital structures. For example, even though CAVA and Wingstop follow a similar business model, there are various differing factors, including products offered and geographic expansion. Both companies have a similar EV, with Wingstop’s being slightly higher. CAVA has an EV of $6.56B while Wingstop has one of $8.23B, as of December 19. In this case, Wingstop’s higher EV indicates that it may be worth more than CAVA. Despite the raw numbers, it is also important to consider Wingstop’s global presence compared to CAVA’s national presence. While CAVA may have a lower EV, it isn’t extremely behind Wingstop despite not having the same global reach. So, a decision about their comparable valuation shouldn’t be done based on EV alone.

The revenues for both companies also add to the full story. For the past twelve months, CAVA has a revenue of $1.13B while Wingstop’s is at $682.98M. In this case, CAVA has higher earnings and as a result, possible higher valuation. Again, this is a promising measure of CAVA’s valuation, especially since the company is much more juvenile compared to Wingstop. And, since CAVA is still actively looking to expand nationwide, there seems to be a lot more space for growth. To quantify recent growth, CAVA has seen roughly 23.93% year-on-year growth in the past year. Wingstop’s has been 15.55%. Even though CAVA has seen a higher revenue growth recently, it is evident Wingstop is still heavily comparable. 15.55% growth indicates that the company is not slowing down operations or lagging behind its previous years.

The EV/EBITDA ratio for both is also useful to look at. The ratio compares EV to EBITDA, which is earnings before interest, taxes, depreciation, depreciation, and amortization. The tool is another valuation metric, typically used to compare competing firms. Low ratios could suggest undervaluation while higher ones could indicate overvaluation. However, these are not absolute guidelines; the formula does have limitations and should always be considered within the context of the specific industry and companies. CAVA has an EV/EBITDA of 50.49 while Wingstop has one of 39.16. In this case, CAVA has the higher ratio. So, does this mean that CAVA is overvalued and Wingstop is immediately the more attractive investment? Not necessarily. Again, the ratio shouldn’t be used in isolation because it doesn’t give attention to external factors. Looking at both EV and revenue trends, it seems CAVA’s high multiple may not be unwarranted. Despite being a young company and a somewhat moderate player in the fast casual space, the company is actively showing high signs of present growth and future expansion. Thus, the multiple may not be fully indicative of this, instead framing the company as slightly overvalued. But, given the other measures, it may be fair to say that Wingstop is slightly undervalued.

While its recent  growth does seem more moderate compared to CAVA, the company is still actively growing. And while it is true that the metrics above may seem unfavorable considering the company is international, it still does not fully frame Wingstop as a bad investment. As a veteran player in the fast casual space, it is reasonable to believe that the metrics aren’t fully indicative of future valuation. When comparing the two multiples, it seems that CAVA appears to be mostly fairly valued while Wingstop may be slightly undervalued.

Finally, another tool to assess profitability is earnings per share (EPS). EPS determines how much profit each stock share has earned, with higher values being indicative of more profitability. Wingstop has an EPS of about $6.14 and CAVA’s is roughly $1.16. Wingstop’s higher EPS frames it as the more attractive investment here because it indicates higher profits. However, if CAVA continues the trend of aggressive growth, then it will likely see an increase in EPS as well. But, it does seem that Wingstop is the more attractive investment based on this specific metric.