As the restaurant sector looks to recover from economic challenges and budget constraints imposed by inflation, analysts highlight the possibility of a more promising long-term horizon. Nick Setyan, an analyst at Wedbush, suggests that two stocks in particular could benefit from a more favorable credit environment and price moderation in the market.
“As food cost inflation continues to moderate, we expect the unfavorable gap for restaurants versus supermarkets to continue. The California Fast Act will exacerbate this gap beginning in April. We also expect the normalization in consumer spending seen in the second half of 2013 to continue through 2024. All income levels will experience healthy growth, but the aspirational uptick has disappeared across all household income levels,” he wrote.
The companies to keep an eye on are Dutch Bros and CAVA Group.
Dutch Bros Inc.
Founded in 1992, the Dutch Bros. chain of self-service coffee shops has experienced extraordinary growth in recent years. With 794 locations in 16 states, Dutch Bros has diversified its menu and consistently committed to quality, attracting customers seeking high-quality beverages and snacks. For that reason, investors may find Dutch Bros a more attractive option than Starbucks Co.
There are several reasons for this; Christine Barone will take over as CEO of Dutch Bros on Jan. 1, 2024, bringing with her previous Starbucks experience. In the most recent quarter, Dutch Bros’ physical store sales were up 4% year-over-year, showing positive performance in the consumer discretionary sector.
Dutch Bros’ nimble structure, operating under both ownership and franchise, along with more affordable beverages and efficient drive-thru service, position it as an attractive option. In addition, Dutch Bros has outpaced Starbucks in growth rates, posting a 33.2% increase in Q3 2023 revenue. With more than 770 locations in 15 states, Dutch Bros plans to open 150 new locations by 2023 and anticipates opening more than 4,000 over the next 10 to 15 years.
Analyst endorsements, such as JP Morgan’s upgrade to “Overweight” and inclusion in Wedbush’s Best Ideas list, along with a short interest of 15.5%, underscore Dutch Bros’ growth potential compared to its competitor.
Add to that, in the latest quarter, Dutch Bros posted record revenues of $265 million, beating expectations and showing a 33% year-over-year increase. Dutch Bros. shares have seen positive momentum since the third-quarter report and a bullish review from several analysts, including Setyan, who gives the stock a “Buy” rating with a $37 price target, reflecting their confidence in 17% growth over the next year.
With a moderate Buy consensus among analysts and a median price target of $34.44, Dutch Bros. shares currently trade at $31.67, suggesting an upside potential of 9% over the next 12 months.
CAVA Group
The fast-casual chain specializing in Mediterranean food, CAVA, has captivated consumers with its relative value proposition and steady expansion. Launched to the public markets in June of this year, the company’s initial offering exceeded expectations, and since then, shares have experienced some volatility, reaching highs of $58 and lows of $30.
Cava’s financial results have supported investor confidence, with third-quarter revenue of $175.55 million, beating estimates by $4.11 million. Analyst Setyan, bullish on CAVA’s prospects, has upgraded its recommendation from “Neutral” to “Buy” with a $48 price target, indicating a 12% upside potential in the next year.
Shares of CAVA Group, Inc. have been backed by a consensus recommendation of “Moderate Buy” from twelve analyst firms, Marketbeat Ratings reports. Three analysts suggest holding the stock, while nine rate it a buy. With a 12-month average price target of $48.20, analysts reflect a bullish outlook for the company.
CAVA has experienced several upgrades from analysts recently. Wedbush raised its rating from “neutral” to “outperform,” raising the price target from $35 to $48. Despite the volatility, CAVA shares opened at $42.98 on Monday. The company, which has traded between $29.05 and $58.10 over the past year, has posted a positive performance in its quarterly results, with revenue of $175.55 million and earnings per share of $0.06.
Institutional investors have also shown interest, with 61.83% of shares held by this group.
Which of the two companies is better to invest in? Would you invest in one of these two, or would you prefer to look for other options?
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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)
