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Why El Pollo Loco Holdings, Inc. Stock Jumped 16.8% in June

By Asit Sharma – Jul 11, 2016 at 8:35PM

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Shares of the fire-grilled chicken specialist bounced in a pattern that's familiar to long-term shareholders.

8 Piece Meal. Image source: El Pollo Loco Holdings, Inc.

What: Shares of El Pollo Loco Holdings, Inc. (LOCO -0.84%) leaped 16.8% in June, according to S&P Capital IQ data.

So what: The fast-casual concept achieved its nearly 17% rise without much substantial news to speak of. The stock is down 45% since its IPO in July 2014, and it's spent much of 2016 so far fluctuating between a 20% loss and a 20% gain for the year. 

Propelling the two-year decline is investor disappointment in El Pollo Loco's lower growth rate versus its peers in the fast-casual restaurant industry. In its first-quarter 2016 earnings report, released in May, El Pollo Loco revealed a comparable sales increase of just 0.7% and a nearly 20% decrease in net income. The results caused the stock to decline 16.3% in May.

In June, shares recouped the prior month's loss as investors stepped back in. Why the quick turnaround? Even while the company's total revenue growth has declined, reaching a rate of only 4.3% in Q1 2016, investors seem to find it hard to ignore the fact that El Pollo Loco has become cheap by most valuation measures. For example, the stock currently trades at just 11 times forward one-year earnings.

Now what: El Pollo Loco may be setting itself up for additional gains this year. The company projects that full-year restaurant margins should improve from the first quarter's 20.7% mark, to roughly 21.5% in the best case. It's launched a revamped advertising campaign, featuring the tagline "Fresh From the Grill," which will seek to raise awareness of its entree preparation techniques, including the grilling of citrus-marinated chicken over an open flame.

In addition, management isn't holding back on restaurant expansion. If it hits the high end of its projected opening schedule, El Pollo Loco will launch 35 new restaurants this year. This level would constitute a 7% expansion of the company's total restaurant base during the remaining three quarters of 2016. 

If El Pollo Loco does indeed improve margins, ramp up store openings, and lift comparable sales, it's likely to garner a fresh look from the market, which has so far been content to let company stock trade at a discount to its competitors. This would break a familiar pattern of almost monthly peaks and troughs, as investors swing between doubt over growth and hunger for a bargain. 

Asit Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

El Pollo Loco Holdings Stock Quote
El Pollo Loco Holdings
LOCO
$10.57 (-0.84%) $0.09

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