What a fantastic six months it’s been for El Pollo Loco. Shares of the company have skyrocketed 64.4%, setting a new 52-week high of $16.97. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in El Pollo Loco, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think El Pollo Loco Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons you should be careful with LOCO, plus one 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 $497.1 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 2%. This projection is underwhelming and suggests its newer menu offerings will not catalyze 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. Following the recent surge, the stock trades at 17× forward P/E (or $16.97 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
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