JPMorgan says buy this 'well-managed' Mediterranean restaurant chain with attractive expansion opportunities

Published Mon, Jul 10 20237:26 AM EDTUpdated Mon, Jul 10 202310:53 AM EDT

JPMorgan is gaining confidence in shares of Cava even after its 80% post- initial public offering run. John Ivankoe initiated coverage of the Mediterranean fast-casual chain with an overweight rating and $45 price target, citing its well-capitalized business model and total addressable market opportunity that could yield 1,000 stores by 2031 and 2,000 stores by 2037. CAVA YTD mountain Cava shares since going public "We agree with the market's implicit positive view on the medium/long term story of CAVA," he wrote in a Monday note. "We view this business as this well-designed operating platform and broadly-appealing consumer offering that can expand from its current 263 locations in 22 states to scale into a national brand built on a series of high ROI company-operated restaurants." Since going public last month, shares of the Washington, D.C.-based company have surged nearly 80% to a roughly $4.5 billion market capitalization. Ivankoe's price target implies nearly 14% upside from Friday's close. Key to Ivankoe's investment rationale is Cava's well-managed model and large end-market opportunities as a Mediterranean chain. He views the company's range of customization options as a "highly efficient concept" that should offer enough variety for some customers to enjoy on a frequent basis. "Many bowls are $11-17 at the brand, which will likely limit potential high frequency of lower income cohorts, but we believe the brand has an enduring appeal to a very broad customer base for at least occasional usage," the analyst said. He added that Cava's in-store design and operational setup, which includes cooking certain spreads off-site and selling some at grocery stores such as Whole Foods, "achieves the right balance of consistency, product integrity and freshness." This also fosters brand familiarity. A Mediterranean 'category killer' Other Wall Street firms also initiated coverage of Cava with overweight and buy ratings. Jefferies analyst Alexander Slagle referred to the company as a fast-casual Mediterranean "category killer" with an attractive growth runway and stronger-than-expected total addressable market, while initiating coverage with a buy rating. "All in all, we believe CAVA to be a unique concept and investment opportunity, and we can envision a scenario where the stock can work higher from here, as the year progresses," wrote Piper Sandler's Brian Mullan in a Monday note. Elsewhere, Stifel's Chris O'Cull called Cava a "compelling restaurant growth investment" with a justified premium valuation given its "impressive unit-level economics" and expansion opportunities. Some analysts are standing on the sidelines for now. That includes Morgan Stanley's Brian Harbour, who initiated coverage with an equal weight rating, saying strong fundamentals are already priced in. "While fundamentals should be strong out of the gate, the next 2-3 years should indicate whether we can underwrite the bull case needed for more substantial upside," he wrote, adding that a bull case scenario could yield 64% upside from Friday's close. — CNBC's Michael Bloom contributed reporting.