Two of the hottest restaurant stocks on the market took very different routes to their recent gains.
High-energy coffee chain Dutch Bros (BROS 1.84%) traded sideways for most of 2024 and soared with a great earnings report in November. Mediterranean fast-casual specialist Cava Group (CAVA -1.71%) has been rising all year long, apart from a significant dip in December.
BROS data by YCharts.
In the end, both stocks beat the market this year, and they have soared to lofty valuation ratios. Which food vendor is the better buy on the threshold of 2025?
Two incredible growth stories
Cava and Dutch Bros have been around for decades. The Mediterranean chain opened its first Maryland restaurant in 2010, but the original Dutch Bros pushcart in Oregon was already 18 years old at that point.
Both companies resisted the urge to sell stock on the public market until the last few years. Their initial public offerings (IPOs) provided capital to fund ambitious expansion efforts. Cava had 237 locations by the end of 2022, rising to 352 restaurants in the most recent earnings report. Dutch Bros’ location count jumped from 671 to 950 over the same period.
The similarities don’t stop there. Dutch Bros and Cava prefer company-owned stores over the lightweight (but ultimately less profitable) franchise network model. Following in the franchisee-free footsteps of the Chipotle Mexican Grill (CMG -1.24%) success story, these companies provide tighter quality controls and a more direct involvement from the C-suite leaders in each location’s operations.
How the companies differ
Despite their many shared qualities, there are some huge differences between the two companies.
- Their menus and restaurant experiences could hardly be more different. Cava’s marketing message is built around the healthy nature of the Mediterranean diet, featuring rice bowls and pita rolls inspired by classic Greek cuisine. Dutch Bros is all about friendly energy in each cup and every interaction with the drive-through window’s “Broistas.”
- Dutch Bros insiders own about 3% of the stock, while Cava’s insider ownership stands at 22.9%. If you prefer management teams that align their personal interests with the needs of shareholders, you should appreciate Cava’s more committed leadership team.
- While both stocks are market darlings today, Cava’s shares come with much richer price premiums. The stock trades at 258 times earnings and 14.7 times sales on Dec. 26, 2024. Dutch Bros’ ratios for the same valuation metrics stop at 188 and 7.1.
- Cava’s business is significantly more profitable at this point. The company boasts wider net profit margins and greater returns on both assets and equity. In other words, Cava makes more efficient use of its various types of capital. That’s one reasonable way to earn higher valuation ratios.
Cava wins — by the skin of its teeth
Value investors should not be looking at either one of these high-octane growth stocks. They are richly valued for good reason, but their large growth ambitions also expose their stakeholders to increased risks.
If you’re comfortable with these risks, both Cava and Dutch Bros may be worth a closer look. Cava’s profitable growth story and deep insider commitment make the Mediterranean option slightly more attractive to me.
My analysis might be somewhat controversial, since Dutch Bros currently sports more generous recommendations from the analyst community, while a smaller portion of its shares are sold short. I get it if you prefer Dutch Bros’ focus on younger customers and its more palatable stock price. Your mileage may indeed vary.
Still, I stand by my analysis. Cava is running a more profitable business, and its stock looks like a slightly better buy today.
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Dutch Bros and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
