Portillo’s stock price has taken a beating over the past six months, shedding 20.5% of its value and falling to $10.59 per share. This might have investors contemplating their next move.

Is there a buying opportunity in Portillo's, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Despite the more favorable entry price, we're swiping left on Portillo's for now. Here are three reasons why PTLO doesn't excite us and a stock we'd rather own.

Why Is Portillo's Not Exciting?

Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ: PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.

1. Fewer Distribution Channels Limit its Ceiling

With $710.6 million in revenue over the past 12 months, Portillo's is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can grow faster because it has more white space to build new restaurants.

2. Breakeven Free Cash Flow Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Portillo's broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Portillo’s $596.2 million of debt exceeds the $22.88 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $104.8 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Portillo's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Portillo's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Portillo's isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 33.7× forward price-to-earnings (or $10.59 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.

Stocks We Like More Than Portillo's

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