Quick question. Which restaurant stock is the growth story: the one growing sales at 27% a year, or the one growing at 6%?
Easy, right?
It’s Cava Group (CAVA). The Mediterranean fast-casual chain has been one of Wall Street’s favorite growth names since it went public.
But Adam’s system doesn’t see it that way. Not even close.
Today, I’m putting Cava head-to-head with Brinker International (EAT), the company behind Chili’s.
Same industry. Similar size — Brinker is worth about $8.9 billion, Cava about $6.8 billion.
And they come out of my system looking like two completely different investments.
The X-Ray: Five Out of Six
Adam’s system grades every stock on six factors, each on a 0-to-100 scale where higher is better. Here’s how the two stack up.
Brinker wins five of the six. And look at the margins. Cava scores a 3 on Value. A 13 on Volatility.
Those aren’t close calls.
Cava’s one win is Size, 29-22. That’s because it’s the smaller company, and Adam’s system gives a little extra credit to smaller stocks. It’s the narrowest gap on the board.
The Twist: Growth
Now back to that question I opened with.
Brinker scores an 82 on Growth. Cava scores a 43. How does the company growing sales more than 4 times faster lose the growth matchup by 39 points?
Because sales aren’t the whole story. Earnings are.
Over the past 12 months, Cava grew sales 26.8%. But its earnings per share fell 52.8%. Brinker grew sales just 6.1% — and turned that into 17.8% earnings growth.
The system’s Growth factor assesses whether growth translates into bottom-line results.
Brinker’s does. Cava’s doesn’t.
Not yet, anyway.
What You’re Paying For
That’s where Value comes in. And it’s the widest gap of all six factors.
Cava trades at 108 times this year’s expected earnings. Brinker trades at 15.5 times. Put another way, every dollar of Cava’s expected profit costs you about 7 times as much as a dollar of Brinker’s.
That’s a lot of optimism baked into one stock. And it’s why Cava scores a 3 out of 100 on Value.
Which Way Are They Heading?
Here’s the part I find most useful. A factor score is a snapshot. The trend tells you where it’s going.
Brinker’s Momentum score bottomed at 24 back in February. It has climbed every quarter since and sits at 75 today. That’s more than triple.
In fairness to Cava, its score is improving too. It’s up from 1 in February to 32 now. And the stock has actually outrun Brinker over the past four weeks, up 8% to Brinker’s 5%.
But there’s a big difference between getting better and being good.
Cava has climbed out of the basement. It’s still in the bottom third.
Meanwhile, Brinker is in the top quarter — and still rising.
The Bottom Line
Cava is the story stock. Fast sales growth, a hot brand, a lot of buzz.
Brinker is the boring one. Chili’s. Slower sales. A forward price-to-earnings (P/E) ratio in the mid-teens.
And on nearly every factor Adam’s system measures, boring wins. Brinker grows its earnings, costs a fraction as much per dollar of profit, rides smoother and has the momentum score to show the market is noticing.
Cava might grow into its price someday. But right now, Adam’s system says you’re paying for a growth story that isn’t showing up in the earnings.
Sometimes the growth stock isn’t the one growing.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, What My System Says Today
