Better Buy: Cava vs. McDonald's

If you are looking at the restaurant space and trying to find a good stock to add to your portfolio, you’ll likely be considering industry giant McDonald’s (MCD 0.29%). But what about fast-growing and newly public Cava Group (CAVA -5.04%)? This isn’t exactly a David versus Goliath battle, since the two companies operate in different niches of the restaurant world, but it is certainly a big, established company versus a tiny newbie. There are pros and cons to each. Let’s review.

McDonald’s is the boring but reliable choice

If you are a conservative investor, you will almost certainly prefer McDonald’s over Cava. For starters, McDonald’s has a time-tested concept that serves basic staples in the restaurant space (burgers, soda, and fries). It is highly unlikely that its food offerings will go out of style anytime soon. 

Image source: Getty Images.

That said, McDonald’s is also a giant company. There’s its $185 billion market capitalization to consider, as well as its over 40,000 global restaurants. But it doesn’t actually own all of those restaurants because the company franchises more than 95% of them. So it basically collects fees from its franchisees and a percentage of sales. It’s an asset-light business model that generates a fairly steady stream of income. 

All told, McDonald’s is not particularly exciting, but it is reliable. Plus, the company has raised its dividend annually for 48 consecutive years. The average annualized dividend increase over the past decade was a very respectable 7%. That’s around twice the historical rate of inflation, so the buying power of dividends has grown over time.

At around 2.6%, the dividend yield isn’t exactly huge, but it is a full percentage point higher than what you’d get from an S&P 500 index fund. Add in the solid dividend growth, and McDonald’s could be attractive to conservative dividend growth investors. Meanwhile, the stock’s price-to-earnings and price-to-sales ratios are both below their five-year averages, suggesting that the shares are reasonably priced. While not a deep value, it doesn’t appear that investors buying McDonald’s now would be overpaying. 

Cava is for risk takers

At the opposite end of the spectrum in many ways is Cava, which offers Mediterranean-themed food in a style similar to that of Chipotle Mexican Grill. That has a lot of investors thinking that Cava could be the next Chipotle, a stock that has performed incredibly well since its initial public offering (IPO). That said, Cava is a small fry even compared to Chipotle, given that the former only had 279 restaurants at the end of the second quarter.

CMG Chart

CMG data by YCharts

The big story here is growth. That will most obviously come from new store openings. The goal for the near-term future is to increase the store count by around 15% or so each year, according to management. That’s a very rapid pace of expansion, but it shouldn’t be too difficult to achieve given the still small store count.

However, execution will be key and, at this point, it is hard to gauge how well Cava will perform on that front given its short history as a public company. Indeed, it IPO’d in late June 2023, so it has less than a year under its belt in the public sphere. There’s not a lot of information to go by at this point, including the long-term appeal of the food concept.

Thus, it is hard to put a valuation on the stock. There’s no earnings or business performance track record to consider. Investors buying Cava today are buying based on an expectation that there is a lot of growth potential and, importantly, that management can act on that potential. That’s a risk that only the most aggressive investors should probably take on.

What kind of investor are you?

If you wanted to put a small amount of money into Cava, it probably wouldn’t be a big deal, even if you are a conservative investor. But to make a material commitment today comes with a great deal of uncertainty because the company is still so new to the public markets. Growth investors might find the potential alluring, but even then it would make sense to give the company a few more quarters to prove it can execute on its plans.

The far more boring option is McDonald’s. Hardcore growth investors might not find it all that attractive, but growth and income types probably will, including those with a conservative bent.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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