El Pollo Loco has been treading water for the past six months, recording a small return of 3.7% while holding steady at $11.33. The stock also fell short of the S&P 500’s 13.4% gain during that period.
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 for active Edge members.
Why Do We Think El Pollo Loco Will Underperform?
We're swiping left on El Pollo Loco for now. Here are three reasons we avoid 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 1.5% per year.
2. Fewer Distribution Channels Limit its Ceiling
With $480.8 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 4%. Although this projection suggests its newer menu offerings will catalyze better top-line performance, it is still below average for the sector.
Final Judgment
El Pollo Loco falls short of our quality standards. With its shares trailing the market in recent months, the stock trades at 12.2× forward P/E (or $11.33 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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