Restaurant chain Cava faces Wall Street review after hot debut

INVESTORS are about to get a first look at what sell-side analysts have to say about Cava Group after the fast-casual restaurant chain delivered one of the biggest trading debuts in two years.

Shares of the Mediterranean eatery surged 99 per cent from the initial public offering (IPO) price in their first day of trading on Jun 15 after the company raised US$318 million, or about US$365 million when including the exercise of the underwriters’ over-allotment option. While the stock has fluctuated since then, it’s still up 83 per cent. That makes Cava the best-performing newly public company that has raised more than US$200 million this year, according to data compiled by Bloomberg.

Now all eyes will turn to Wall Street recommendations, as Monday marks the expiration of a quiet period that applies to analysts at banks that underwrote the IPO.

While banks that help guide a company’s introduction to the public markets tend to be more friendly, sell-side analysts from such firms may question Cava’s current valuation, which stands at US$4.6 billion. Some on Wall Street have already done so ahead of the company’s trading debut. Cava shares rose as much as 4.1 per cent on Friday (Jul 7) to US$40.79.

The stock is “terribly overpriced,” New Constructs chief executive officer David Trainer said. Even if shares were trading around US$19.50, which was the midpoint of Cava’s boosted price range, they would still reflect far too aggressive assumptions for company revenue growth and margin improvement, he said.

Bloomberg Intelligence analyst Michael Halen also noted that Cava’s restaurant-level margin in 2022 was lower than that of peers like Chipotle Mexican Grill and Portillo’s.

SEE ALSO

Restaurant chain Cava valued at US$4.7 billion as shares pop on debut

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

“There’s not a lot about the business that could warrant positive views,” said Trainer. “The space is very crowded, and competition is intense.”

Trainer attributes Cava’s post-IPO jump to “Wall Street hype” for the restaurant chain more so than increased investor appetite for a new IPO. Still, Cava has been a bright spot in a dismal year for listings on US exchanges, and the IPO market has shown signs of life ever since.

The list of underwriting banks that may issue coverage of Cava includes JPMorgan Chase, Jefferies Financial Group, Citigroup, Morgan Stanley, Piper Sandler, Baird, Stifel Financial and William Blair. BLOOMBERG