Fast casual, big opportunity

Everyone wants good food at a reasonable price, but these days it’s difficult to have your cake and eat it, too.

Unless, of course, you’re a fast-casual restaurant. Once thought of as a healthier yet more expensive alternative to fast food, fast casual is flipping the script. Inflation has forced once-cheap eateries like McDonald’s to raise prices, while pressure from major markets like California, which recently raised the minimum wage, have sent prices skyward.

But for restaurants like Chipotle, Cava, and Sweetgreen, shifts in consumer preferences have been a boon that these outlets are capitalizing on. According to data collected by Bloomberg, over the last four years the number of fast-casual restaurants has grown twice as fast as the number of fast-food restaurants.

And it’s not like these eateries aren’t raising prices just like their fast-food counterparts—it’s simply that they don’t appear to be selling lunches at such a premium anymore. Suddenly, the price difference between fast food and fast casual is small enough that customers are choosing the healthier option, spurring big gains for fast-casual stocks.

• Shares of Cava, which reports earnings next week, have risen over 96% in 2024.
• Sweetgreen is up 96% year to date.
• Chipotle has jumped almost 42% in 2024.

Analysts are broadly bullish on these three stocks, but those share price gains are raising eyebrows, and don’t leave a lot of room for more growth—if any at all.

Of the three, Chipotle has the most wiggle room and some of the best fundamentals. The company reported a 14% increase in revenue last quarter, while same store sales rose 7%, and management expects the growth to continue as it rolls out new initiatives like drive-thru Chipotlanes. Analysts are unanimously bullish, with their average price target coming in at $3,243.46, according to TipRanks—though that’s just 1.74% above today’s price.

The average analyst price target for Cava, however, is $65.73—18.32% lower than today’s price. As for surging Sweetgreen, keep in mind that the company has yet to post a profit as a public company, and EPS missed expectations last quarter. Analysts have an average price target of $27.50 for the stock, nearly 15% lower than where it stands today.—MR