Shares of El Pollo Loco Holdings Inc Tumble on Growth Outlook; the Reaction May Be Short-Sighted

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Source: Coolcaesar at Wikimedia Commons.

What: Shares of El Pollo Loco Holdings Inc (LOCO 0.73%) fell as much as 16% on Friday after the company reported first-quarter results that exhibited disappointing comparable-restaurant sales. Shares were down about 14% as of 1 p.m.

Now what: As the following table demonstrates, El Pollo Loco actually beat Wall Street's expectations with regard to both revenues and earnings per share in the first quarter:

*Adjusted
Source: Thomson Financial Network, El Pollo Loco Holdings

However, at $0.69, the midpoint of the guidance range for full-year earnings per share is a penny shy of the consensus estimate. Furthermore, systemwide (i.e., company-operated and franchise restaurants) comparable-restaurant sales grew at 5.1%, below the 5.5% analysts were looking for, according to a survey by Consensus Metrix (hat-tip to Reuters). At company-operated restaurants, traffic rose just 0.1% -- the slowest rate since El Pollo Loco became a publicly traded company last July. For 2015, El Pollo Loco expects systemwide comparable-restaurant sales growth of 3% to 5%.

Nevertheless, despite the market's unambiguous reaction, it's worth keeping these numbers in perspective. As CEO Stephen Sather pointed out during the company's earnings conference call, "the [5.1%] increase in comparable sales growth marked our 15th consecutive quarter of positive same store sales and came on top of a 7.2% growth last year." That's not the only avenue for growth, naturally -- Sather said that "switching to development, our pipeline continues to be robust and positions us for 8% to 10% unit growth over the long-term."

So what
At 24 times trailing earnings and 38 times cash flow, per research firm Morningstar, shares of El Pollo Loco sport a bona fide growth stock valuation. As such, even small stumbles with regard to growth expectations can produce a significant rerating of the stock, particularly in a market in which there is an increasing number of alternative issues. Nevertheless, it's not at all clear that this most recent set of results represents a major blow to the long-term thesis for owning the shares, which is what today's price action would suggest. Long-term shareholders ought to remain calm while verifying that for themselves.