On Wednesday, Morgan Stanley (NYSE:MS) updated its financial model for CAVA Group Inc (NYSE:CAVA) following the company's third-quarter earnings report. The firm raised the price target to $135 from $123, while keeping an Equalweight rating on the stock. The revision reflects a more optimistic outlook for the restaurant chain's same-store sales (SSS) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
The analyst noted that the fourth-quarter SSS estimate has been increased to 18.2% from the previous 11.0%, surpassing the pre-results market consensus of 11.3%. This adjustment is based on stronger customer traffic that is expected to continue, resulting in a full-year SSS growth forecast of 13.2%, which is slightly higher than CAVA's guidance of 12-13%. If the two-year trend persists, there might be further upside in the fourth quarter.
Morgan Stanley's revised estimates also include a higher fourth-quarter revenue projection, now at $228 million, up from $215 million, and above the street's expectation of $212 million. The full-year revenue forecast has been adjusted to approximately $965 million from the prior $944 million. The fourth-quarter restaurant-level margin (RLM) is estimated to improve to 23.2%, compared to 23.0% previously and higher than the market's expectation of 22.5%. This leads to an anticipated full-year RLM of 25.2%, slightly up from 25.1% and above CAVA's guidance of 24.5-25.0%.
The higher SSS and improved margins have led to an updated fourth-quarter adjusted EBITDA estimate of $24 million, with the full year reaching $125 million, which is near the top end of the company's guidance range of $121-126 million. Looking ahead to 2025, the analyst expects SSS to increase to 8.8% from the previous 6.6% estimate, driven by stronger customer traffic, particularly in the first half of the year. Despite potential reinvestment plans by the company in staff and guests, margins are projected to expand year-over-year, remaining at the forecasted 25.5%.
The price target adjustment to $135 from $123 is based on approximately 35 times the revised 2032 EBITDA, discounted back at a roughly 9% weighted average cost of capital (WACC). The firm maintains its Equalweight rating primarily due to valuation, suggesting that while positive elements in CAVA's story continue, the current price target already reflects a robust multiple on future earnings.
In other recent news, CAVA Group Inc. has been the subject of analyst attention following a strong third-quarter performance. CFRA upgraded their rating on CAVA from Hold to Buy and increased the price target to $200, a significant leap from the previous $125. This adjustment comes after CAVA reported revenues of $244 million, a 38.9% increase year-over-year, surpassing consensus estimates by $10 million. Additionally, the company's adjusted EBITDA exceeded expectations, coming in at $33.5 million.
The positive results were attributed to an impressive 18.1% growth in same-store sales, leading to a revision in the company's 2024 same-store sales growth forecast. The adjusted EBITDA outlook for 2024 has also been lifted. In response, TD (TSX:TD) Cowen, an investment firm, raised its price target for CAVA Group to $150, maintaining a Buy rating on the stock.
InvestingPro Insights
CAVA Group Inc's recent performance aligns with Morgan Stanley's optimistic outlook. According to InvestingPro data, CAVA's revenue growth stands at an impressive 31.01% for the last twelve months as of Q2 2024, with quarterly revenue growth reaching 35.05% in Q2 2024. This robust growth supports Morgan Stanley's increased revenue projections.
The company's strong financial health is further evidenced by two key InvestingPro Tips: CAVA's liquid assets exceed short-term obligations, and it operates with a moderate level of debt. These factors contribute to the company's ability to invest in growth and maintain operational flexibility.
InvestingPro Tips also highlight that CAVA is trading at high valuation multiples across various metrics, including earnings, EBIT, EBITDA, and revenue. This aligns with Morgan Stanley's Equalweight rating based on valuation concerns, despite the positive outlook.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for CAVA, providing a deeper understanding of the company's financial position and market performance.
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