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Is Recent Restaurant IPO Portillo's Worth Watching in 2022?

By Rhian Hunt – Dec 30, 2021 at 7:45AM

Key Points

  • Portillo’s, which went public in late October, had strong gains last week.
  • Its revenue is up year over year, but current challenges are making earnings falter.
  • The company has expansion plans for the coming year, plus a new restaurant type.

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The Chicago-style hot dog and Italian beef chain is facing inflationary headwinds.

Portillo's Restaurant Group (PTLO 1.38%), a restaurant sector newcomer after its Oct. 21 initial public offering (IPO), has registered some dramatic ups and downs since its trading debut. The company, whose menu centers on Chicago-style hot dogs, Italian beef sandwiches, char-grilled burgers, and fresh salads saw its stock price jump close to 6% right before Christmas, and about 20% during Christmas week.

The stock market is currently optimistic about the eatery chain, although it's facing inflation concerns like the rest of the sector, as well as labor shortages, supply chain issues, and lingering COVID-19 disruptions. Many indicators look bullish, but you might want to pick your entry point carefully. Here are three important factors to consider.

A Portillo's restaurant in the evening in Naperville.

A Portillo's in Naperville, Illinois. Image source: Portillo's.

1. The market's positive, but not just for Portillo's

Portillo's gained nearly 6% in trading on Dec. 23, after a Securities and Exchange Commission filing detailed the addition of an eighth member to the previously seven-member board of directors. This fresh addition, Paulette Dodson, is described as a "seasoned legal executive" as well as "a strategic leader and talented legal mind who brings a wealth of knowledge" with 30 years of experience advising a range of different CEOs of private companies and organizations. The company says it expects her to provide "strategic guidance" for future growth.

While superficially, Dodson's nomination looks like it boosted Portillo's shares, many restaurant companies rose sharply on Dec. 23. Gains included a 7.6% surge for Dutch Bros, a coffee chain that is seeing outstanding demand; a more than 5% jump for salad restaurant Sweetgreen despite its struggles with expenses; and more modest gains for established companies like the recently energized parent of Burger King and Tim Hortons, Restaurant Brands International.

Portillo's rise matches the robust jump posted by fellow recent restaurant IPOs like Dutch Bros. These gains seem driven by analyst confidence that the omicron variant of COVID-19 shouldn't affect restaurant sales significantly. Peter Saleh, a restaurant analyst at financial services firm BTIG, told Yahoo! Finance that the labor shortage was more important to the fortunes of restaurants right now than the pandemic. This shows external factors are just as important to Portillo's stock market success as any internal strategies, and that it probably won't significantly buck sector trends.

2. The company's financials are mixed

Top-line metrics for Portillo's are strongly positive, with revenue jumping 15.3% year over year to $138 million. Both a 6.8% surge in same-restaurant sales and five new restaurant openings contributed to the gain. Zeroing in on revenue details during the third-quarter earnings call, CFO Michelle Hook said the same-restaurant sales were "primarily driven by a 7.9% increase in average check, partially offset by a decrease in our traffic." The bigger individual purchases resulted from customers buying more items and more-expensive items, alongside price increases.

At the bottom line, however, net income dropped 19.4% to $6.5 million. Rising labor and raw material costs, especially more-expensive beef, ate into Portillo's profits during the quarter. In short, the chain is struggling with the effects of the inflation rampant in the American economy. But while that inflation is currently at a 40-year high at 6.9%, analysts expect it to ease to 2% or 3% during 2022.

One more important financial fact about Portillo's is that only about 28% of its shares were sold to new investors during the IPO. Much of the rest is in the hands of Berkshire Partners, a private equity firm that bought Portillo's back in 2014. If Berkshire decides to sell its shares, it will flood the market and almost certainly cause the stock to plunge much lower.

3. Portillo's is expanding, with the Sunbelt in its crosshairs

Though Portillo's had only 69 locations at the time of its third-quarter earnings report, it has fairly aggressive expansion plans. It intends to open seven more restaurants in 2022, a roughly 10% boost, along with continuing its current program of delivering food in all 50 states.

During the earnings call, CEO Michael Osanloo said the company believes that in the long term, there's potential for over 600 Portillo's restaurants throughout the country. The chain plans to keep expanding its presence in the Midwest, its current center of operations. As a second strategic initiative, though, it's also taking aim at states in the Sunbelt for new openings, with Arizona, Florida, and Texas earmarked for development. While the expansion is relatively small at this stage, it should enable Portillo's -- and investors -- to assess demand for the restaurant chain's food outside its current Midwestern territory.

Lastly, Portillo's is launching an experimental restaurant in Illinois with no dine-in facilities. It will feature "three drive-through lanes as well as a pickup area, catering, and delivery," according to Osanloo. With delivery and pickup much more popular since the pandemic's arrival, the new restaurant setup could enable Portillo's to boost its footprint without the full expense of maintaining a dine-in area in areas with low foot traffic but good ordering potential.

What's a good entry point for Portillo's stock?

While Portillo's saw its earnings drop under pressure from input inflation, COVID-19, and the current labor shortage, these challenges will likely be temporary. The pressures will probably ease sometime in 2022, at which time Portillo's robust revenue growth and expansion plans should give it some bullish momentum as a good pick among restaurant stocks.

In the meantime, however, it looks like Portillo's will see strong swings in share value for some time, as often happens following an IPO. The biggest wild card, though, could be Berkshire Partners' major stake in the company. Waiting another few months to see if Berkshire sells after the lockup expiration, and then waiting for a dip in share prices below the new average range, might be the best strategy to get into this newly minted public company before the late-2022 or 2023 rebound as inflation eases.

Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool recommends Restaurant Brands International Inc. The Motley Fool has a disclosure policy.

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