Stifel sees over 30% downside risk for US restaurant stocks

Tuesday, Stifel analysts issued a client note expressing a cautious stance on US restaurant stocks amidst recent market fluctuations and subdued consumer spending. Stifel’s analysis indicates that, historically, restaurant stocks have faced significant challenges during economic downturns, including mid-teens annual earnings revisions and valuation multiple compressions of up to 55% during the 2007-2009 financial crisis. For investors seeking deeper insights, InvestingPro data reveals that restaurant stocks like CAVA currently trade at significant premiums, with a P/E ratio of 86.39 and high EBITDA multiples.

The note did not predict a recession but acknowledged a rising probability of one occurring. Stifel’s revised estimates for several restaurant companies reflect a conservative outlook, suggesting that restaurant stocks could see more than a 30% downside risk in their prices if past recession trends hold true.

Stifel highlighted that companies with strong sales momentum and emerging brands with potential for earnings per share (EPS) growth could outperform in a downturn. Conversely, the firm recommended that investors steer clear of companies attempting turnarounds or those experiencing slowing growth.

Among the favored stocks, Stifel singled out Domino’s, Dutch Bros, and CAVA, citing their robust sales momentum and unique sales drivers. At the time of the note, Dutch Bros and CAVA were rated as "Buy" with stock prices at $58.39 and $89.04, respectively. These companies were identified as potentially more resilient investments during challenging economic times. InvestingPro analysis shows CAVA’s impressive 32.25% revenue growth and strong financial health, with a current ratio of 2.97. Despite recent market volatility, CAVA has demonstrated resilience with a 13.48% return over the past week. Get access to 15+ additional ProTips and comprehensive valuation metrics with an InvestingPro subscription.

In other recent news, CAVA Group Inc has reported significant developments that are drawing attention from investors. The company announced a fourth-quarter comparable sales growth of 21.2%, surpassing both internal and consensus estimates, driven by increased customer traffic and higher average check sizes. Stifel analysts maintained a Buy rating on CAVA with a price target of $175, citing strong brand recognition and strategic initiatives as key factors in the company’s robust performance. Piper Sandler also upgraded CAVA’s stock rating to Overweight, although the price target was adjusted to $115, reflecting confidence in the fast-casual dining sector’s growth potential.

Additionally, CAVA Group is set to join the S&P MidCap 400, replacing Altair Engineering, which could enhance the company’s visibility among investors. BofA Securities initiated coverage on CAVA with a Buy rating and a $112 price target, highlighting the company’s strong business model and growth potential. Analysts at BofA Securities believe CAVA is well-positioned to sustain its growth trajectory despite current economic concerns. These recent developments indicate a positive outlook for CAVA Group, as the company continues to expand its market presence and capitalize on growth opportunities.

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