What a fantastic six months it’s been for El Pollo Loco. Shares of the company have skyrocketed 53.7%, hitting $14.24. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy El Pollo Loco, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think El Pollo Loco Will Underperform?
We’re happy investors have made money, but we're swiping left on El Pollo Loco for now. Here are three reasons there are better opportunities than LOCO and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
El Pollo Loco’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.7% per year.
2. Fewer Distribution Channels Limit its Ceiling
With $490 million in revenue over the past 12 months, El Pollo Loco is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect El Pollo Loco’s revenue to rise by 1.4%, close to This projection doesn't excite us and implies its newer menu offerings will not lead to better top-line performance yet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of El Pollo Loco, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 14.2× forward P/E (or $14.24 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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