BUSINESS
El Pollo Loco Holdings, Inc., through its subsidiary, El Pollo Loco, Inc., develops, franchises, licenses, and operates quick-service restaurants under the El Pollo Loco name. As of May 04, 2022, the company operated 480 restaurants comprising 189 company-operated and 291 franchised restaurants located in California, Nevada, Arizona, Texas, Utah, and Louisiana. It also licenses one restaurant in the Philippines. The company was formerly known as Chicken Acquisition Corp. and changed its name to El Pollo Loco Holdings, Inc. in April 2014. El Pollo Loco Holdings, Inc. was founded in 1975 and is headquartered in Costa Mesa, California.
INVESTMENT RATING
LOCO is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
El Pollo Loco Holdings has a current Value Trend Rating of C (Neutral).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. El Pollo Loco Holdings has a neutral Appreciation Score of 58 and a neutral Power Rating of 41, leading to the Neutral Value Trend Rating.
El Pollo Loco Holdings’ stock is selling well below targeted value. The current stock price of $8.62 compares to targeted value 12 months forward of $13.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
El Pollo Loco Holdings has a Power Rating of 41. (This neutral Power Rating indicates that LOCO’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the Eating Places comparison group is in a slightly weakened position currently; and recent price action has been slightly unfavorable. An offsetting factor is earnings estimate behavior for LOCO has been slightly favorable recently.
INVESTMENT PROFILE
LOCO’s financial strength is low. Financial strength rating is 27.
Relative to the S&P 500 Composite, El Pollo Loco Holdings Inc has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that LOCO is higher risk. All factors are relative weaknesses. Relative weaknesses for LOCO include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, and high earnings variability. LOCO’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. LOCO has unusually low market capitalization.
CURRENT SIGNALS
El Pollo Loco Holdings’ current operations are strong. Return on equity is rising, reflecting: and improving asset utilization.
El Pollo Loco Holdings’ current technical position is very weak. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
El Pollo Loco Holdings Inc (NASDAQ: LOCO). Important negative changes in investment behavior have recently occurred: its shorter term price trend turned down.
The stock is currently rated C.
El Pollo Loco Holdings Inc (NASDAQ: LOCO) stock declined modestly by -1.8% on 3/12/24. The stock closed at $8.62. This decline was accompanied by normal trading volume. Relative to the market the stock has been weak over the last nine months and has declined -5.2% during the last week.
CASH FLOW
In 2022, El Pollo Loco Holdings experienced a very significant reduction in cash of -$9.55 million (-32%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$47.15 million. Non-operating uses consumed -$2.18 million (-5% of EBITDA). Cash taxes consumed -$5.03 million (-11% of EBITDA). Re-investment in the business amounted to -$16.96 million (-36% of EBITDA). On a net basis, debt investors provided +$17.74 million (+38% of EBITDA) while equity investors withdrew -$50.28 million (-107% of EBITDA).
LOCO’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the El Pollo Loco Holdings Peer Group. In most years, El Pollo Loco Holdings was in the second quartile and top quartile. Currently, El Pollo Loco Holdings is slightly above median at -5% of EBITDA (-$2.18 million).
LOCO’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the El Pollo Loco Holdings Peer Group. In most years, El Pollo Loco Holdings was in the top quartile and lower quartile. Currently, El Pollo Loco Holdings is lower quartile at -11% of EBITDA (-$5.03 million).
LOCO’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the El Pollo Loco Holdings Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, El Pollo Loco Holdings was in the top quartile and second quartile. Currently, El Pollo Loco Holdings is slightly above median at -36% of EBITDA (-$16.96 million).
LOCO’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the El Pollo Loco Holdings Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, El Pollo Loco Holdings was in the third quartile and second quartile. Currently, El Pollo Loco Holdings is substantially above median at +38% of EBITDA (+$17.74 million).
LOCO’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the El Pollo Loco Holdings Peer Group. (Since 2020 Equity Investors, %EBITDA has accelerated very sharply.) In most years, El Pollo Loco Holdings was in the second quartile and top quartile. Currently, El Pollo Loco Holdings is lower quartile at -107% of EBITDA (-$50.28 million).
LOCO’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the El Pollo Loco Holdings Peer Group. In most years, El Pollo Loco Holdings was in the third quartile and second quartile. Currently, El Pollo Loco Holdings is below median at -20% of EBITDA (-$9.55 million).
LOCO’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the El Pollo Loco Holdings Peer Group as well. In most years, El Pollo Loco Holdings was in the third quartile and lower quartile. Currently, El Pollo Loco Holdings is slightly below median at +4%.
PROFITABILITY
LOCO’s return on equity has improved significantly since 2014. The current level of 10.2% is 1.04X the low for the period and is -49.5% from the high.
A major analytical focus for LOCO is a very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors.
The productivity of LOCO’s assets remained stable over the full period 2013-2023: asset turnover has exhibited little to no overall change.
Additionally, pretax margin enjoyed a volatile overall uptrend that stabilized from the 2022 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
LOCO’s return on equity is at median (10.2%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is at the upper quartile (5.9%) reflecting asset turnover that is at median (0.79X) and pretax margin at the upper quartile (7.4%).
Tax “keep” rate (income tax management) is lower quartile (73.3%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is below median (2.36X).
GROWTH RATES
Overall, El Pollo Loco Holdings’ growth rate has slowed very considerably in recent years.
El Pollo Loco Holdings’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 3.2% per year.
Total asset growth has been 3.4% per year. (More recently it has been -2.2%.)
Annual E.P.S. growth has been 0.7% per year.
Equity growth has been 8.7% per year. (More recently it has been 1.7%.)
No consensus growth rate forecast is available for El Pollo Loco Holdings.
Relative to the El Pollo Loco Holdings Peer Group, El Pollo Loco Holdings’ historical growth measures are generally third quartile. Equity growth (8.7%) has been upper quartile. Total asset growth (3.4%) has been below median. Revenue growth (3.2%) has been slightly below median. E.P.S. growth (0.7%) has been slightly below median.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, El Pollo Loco Holdings’ stock price performance has been variable and significantly below market. Between July, 2014 and March, 2024, El Pollo Loco Holdings’ stock price fell -78%; relative to the market, this was a -92% loss. Significant price moves during the period: 1) January, 2021 – September, 2022: -56%; 2) March, 2020 – July, 2020: +134%; and 3) April, 2015 – September, 2015: -59%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -24.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -24.3% is slightly above median relative to El Pollo Loco Holdings Inc Peer Group.
Current 5-year total return performance of -7.2% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -7.2% relative to S&P 500 Composite, El Pollo Loco Holdings’ total return performance is slightly above median relative to El Pollo Loco Holdings Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, LOCO’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/assets, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor is the ratio of enterprise value/revenue.
Relative to El Pollo Loco Holdings Peer Group, LOCO’s overall valuation is normal. The highest factor, the price/earnings ratio, is at the upper quartile. Ratio of enterprise value/revenue is at the upper quartile. Price/equity ratio is at median. Ratio of enterprise value/assets is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is below median.
El Pollo Loco Holdings has a very large value gap compared to the median. For LOCO to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.14X to 0.97X. If LOCO’s ratio of enterprise value/revenue were to fall to 0.97X, its stock price would be lower by $-3 to $6.
For LOCO to achieve upper quartile valuation relative to the El Pollo Loco Holdings Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.14X to 1.14X. If LOCO’s ratio of enterprise value/revenue were to rise to 1.14X, its stock price would increase by $0 from the current level of $8.62.
VALUE TARGETS
LOCO is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
El Pollo Loco Holdings’ current Price Target of $14 represents a +57% change from the current price of $8.62.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 58, the neutral Power Rating of 41 contributes to an Value Trend Rating of C.
El Pollo Loco Holdings’ current Price Target is $14 (+0% from the 2022 Target of $13 and +57% from the 03/12/24 price of $8.62). This plateau in the Target is the result of a +0% decrease in the equity base and a +1% increase in the price/equity multiple. The forecasted decline in growth has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a large positive impact.
PTR’s return on equity forecast is 8.9% — in line with our recent forecasts. Forecasted return on equity erratic but little changed between 2014 and 2022. The current forecast is steady at the 2020 peak of 11%.
PTR’s growth forecast is 5.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is below the 2016 peak of 7%.
PTR’s cost of equity forecast is 6.6% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2014 and 2022. The current forecast is steady at the 2019 peak of 7.9%.
At El Pollo Loco Holdings’ current price of $8.62, investors are placing a negative value of $-3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 10.0% per year, and a return on equity of 8.1% versus a cost of equity of 6.5%.
PTR’s 2024 Price Target of $14 is based on these forecasts and reflects an estimated value of existing assets of $10 and a value of future investments of $3.
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