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What You Need to Know Before This Crazy Chicken IPO

California fast food chicken chain El Pollo Loco is coming to a stock market near you. The company has filed to go public so it can raise $100 million to pay off corporate debt. This is just the latest in a growing list of high-profile restaurant IPOs.

You're likely to hear a lot about this IPO in coming weeks, but here are a few things to consider.

Two reasons for excitement
The first reason why investors will be hungry for El Pollo Loco's IPO is the food itself. In a survey by Consumer Reports, El Pollo Loco ranked second in taste -- second only to Chick-fil-A. That ranks El Pollo Loco higher than Popeyes (NASDAQ: PLKI  ) , and higher than Yum! Brands'  (NYSE: YUM  ) KFC, which ranked dead last.

While good food isn't the only factor in running a restaurant business, it should be the No.1 factor. El Pollo Loco has it, and that's likely why the company boasts 11 consecutive quarters of comp-sales growth. Its comparable-store sales have grown at an eyebrow-raising average of 7.7% per quarter over this 11-quarter stretch, including 7.2% in the first quarter of 2014 -- the same quarter when most restaurants saw their sales fall due to cold weather.

The second reason for the hype about this IPO is because El Pollo Loco really is a unique concept. The top five chicken chains by sales -- Chick-fil-A, KFC, Popeyes, Church's, and Bojangles' -- are all fried chicken concepts. El Pollo Loco is strictly a grilled chicken player, which makes it stand out more easily.

Grilled chicken also gives El Pollo Loco the edge with a healthier product.

Restaurant/Product Fat Carbohydrates Calories Cholesterol Sodium
El Pollo Loco Flame-Grilled Chicken Breast 9g 0g 220 140mg 620mg
KFC Original Recipe Chicken Breast 14g 13g 320 145mg 1130mg
Popeyes Bonafide Mile Chicken Breast 27g 16g 440 110mg 1330mg

With the ever-growing number of health-conscious consumers, this grilled chicken may give El Pollo Loco even further differentiated appeal.

Two reasons for caution
The fact that El Pollo Loco wants to go public is in itself a caution flag. Remember that Firehouse Subs' CEO shot down hopes of a Firehouse IPO by saying the company didn't have "any significant capital needs." In other words, Firehouse is so successful and profitable that it grew its unit count 27% in 2013 and still doesn't need a dime from Wall Street.

When a company goes public, the business is often not meeting a financial need. In El Pollo Loco's case, it needs to pay off its corporate debt. The company has $20 million in cash, but $289 million in debt. That's about even with its 2013 revenue of $294 million. 

With a debt load that significant the company obviously needs to deal with it, but even with a successful IPO El Pollo Loco won't even cut its debt in half. 

Perhaps more unnerving is the reason why it has so much corporate debt. A big part of the problem is that this chain is not profitable. It has reported net losses for the last four fiscal years, which include a $17 million loss last year.

However, the situation could be looking up as the company reported a $5 million profit in the first quarter of 2014.

The second reason to be cautious is that this isn't a compelling growth story -- something that IPO investors have come to expect lately with growth chains like Noodles & Company and Zoe's. According to the S-1 filing, El Pollo Loco only has 11 new locations currently in its pipeline. With 401 current locations, that's not growth that will satisfy ravenous Street expectations.

Rather than focusing on new unit growth, the company is focusing on same-store growth and a big remodeling project. These things aren't necessarily bad things, but I doubt they'll be what investors are looking for.

One closing final thought
IPO's are exciting, but be careful...they're also volatile. When you invest you must be convinced enough about the business itself to weather some tough storms. El Pollo Loco will most certainly have days with huge gains, followed by huge losses, all with little-to-no news whatsoever. It's not for the faint of heart, but it's exciting to be an investor from day one.

If you're looking to learn more, don't pass up El Pollo Loco's prospectus.

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Jon Quast

I've been a contributor with the Motley Fool since 2012. My love of good food keeps me mostly analyzing the restaurant sector. But I'll jump into any sector when I see a shining value opportunity.

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