Forget McDonald’s: Buy Stock in This Unstoppable Restaurant Company Instead

It can’t be denied McDonald’s is still the king of the restaurant industry. Its 40,000 stores combined to do $119.8 billion in sales last year, generating $25.5 billion in revenue and $8.5 billion in net income for the company. No other name even comes close to those numbers.

From an investor’s perspective, however, size isn’t everything. In fact, size can even be a disadvantage, as it makes it difficult to add more growth. In some cases, the primary competitor to a new McDonald’s location may be another nearby McDonald’s restaurant that is already operating.

If you are looking for a more promising offer in the fast food restaurant category, consider Cava Group (COFFEE 7.51%) Instead.

What is Cava?

With just 323 restaurants in the first quarter, Cava isn’t exactly a household name like McDonald’s. But in the places where Cava has been operating for a while, consumers love its Mediterranean dishes. Its pita wraps and bowls are ideal for the fast-casual model, while also meeting demand from evolving consumer preferences.

While burgers have dominated the fast-food restaurant landscape for decades, their health flaws are finally starting to catch up. The fortified bread used to make most burger buns and heavily processed red meats are losing popularity. Consumers are increasingly willing to pay a small premium for fresh, natural ingredients like those used by Cava.

The real draw, though, is the food itself. It’s relatively undiscovered by most American consumers, who discover that once they try it, they like it. Its health benefits are just an added bonus in the marketplace.

In other words, it’s the “something different” that consumers across the fast-casual restaurant industry have clearly been waiting for.

Cava has the results to prove it

And Cava’s numbers back that statement up.

Take the first-quarter results, for example. In the three months ended April 21, Cava increased its revenue 30.3% year over year to $256.3 million, while same-store sales rose 2.3%, compared with a very difficult comparison of 28.3% in the same period a year earlier.

What’s more, despite its youth and small size, Cava Group is increasingly profitable. Earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter came in at $33.3 million, doubling year over year, and net income of $14.0 million completely reversed the prior-year loss of $2.1 million. Cava drove this profitability by opening 14 new restaurants during the quarter.

Overall, the first-quarter numbers extend existing trends that are expected to last at least into next year. In May, the company raised its full-year EBITDA forecast from a previous range of $86 million to $92 million to a revised range of $100 million to $105 million. Same-store sales growth forecasts were also raised. Analysts collectively predict revenue growth of at least 20% this year and next, and earnings per share are expected to more than double over those two years. All of this points to one hell of a tailwind.

The bottom line: Cava Group is essentially debt-free. As of April, its only long-term liabilities to speak of were operating lease obligations, mostly from rents it agreed to pay to restaurant owners. As the numbers above show, Cava restaurants tend to operate profitably early on.

More importantly for interested investors, Cava enjoys financial flexibility because it is not dependent on bondholders who expect to receive regular interest payments regardless of whether their payment is in the best interests of the organization at a given time.

More reward than risk

So is Cava a guaranteed winner? No, there is no such thing, especially in a business as fiercely competitive as the restaurant industry. The stock is also very expensive relative to earnings. Young growth stocks also tend to be uncomfortably volatile, and Cava Group is no exception.

Still, the potential reward here is more than worth the premium for risk-tolerant investors. Cava has plenty of room to continue expanding its presence in the coming years, and plenty of reason to believe it will be able to do so.