By now just about everybody has heard of Chipotle Mexican Grill (NYSE:CMG), but few outside California before its IPO had heard of El Pollo Loco (NASDAQ:LOCO). It can be awfully tempting to ditch the seemingly more mature Chipotle chain and try to latch on to the next big thing. But is hitching a ride with the new kid on the Wall Street block really the smart move?
On Sept. 4, El Pollo Loco reported fiscal second-quarter results. Revenue popped 6.3% to $86.9 million. Same-store sales were up 5%. Adjusted net income rose 10% to $6.1 million, or $0.16 per diluted share.
CEO Steve Sather stated in the release that the company is "pleased" with the results and credited the gains from customers increasingly being attracted to El Pollo Loco's "value proposition" and "the growing appeal of healthier, better-for-you offerings."
Value, healthy, and a Mexican-sounding name may sound like Chipotle Mexican Grill, but the quarterly results are anything but Chipotle. Compare those so-so growth numbers with Chipotle's last quarter. Chipotle reported that its revenue exploded 28.6%, same-store sales increased 17.3%, and net income leaped 25.5%. By comparison, El Pollo Loco wasn't even playing the same sport, never mind being in the same league.
Founder and co-CEO Steve Ells credited the success with the growing popularity of its "special food culture," similar to El Pollo Loco, and unlike El Pollo Loco, he also credits the success from "our vision to change the way people think about and eat fast food." Fast casual is a different breed from fast food.
"Loco" means crazy, and crazy means fast
Maybe it's because few people outside California have been inside an El Pollo Loco, but there seems to be a misconception among many on Wall Street that El Pollo Loco is another fast-casual Mexican food chain like Chipotle. You've probably heard that drum being beaten if you watched CNBC late last week.
The reality is that around half of El Pollo Loco's sales are just grilled chicken, not burritos, tacos, or other dishes more commonly thought of as Mexican food. The other reality is that El Pollo Loco is indeed fast food, or the very thing Chipotle claims to be winning customers away from. Think of El Pollo Loco a fire-grilled version of KFC, only El Pollo Loco will slip some chicken into a tortilla for you if you want.
El Pollo Loco does claim in its filings that the acceptance of Mexican food in general is helping its business, but the company also makes clear that it's in the quick-service industry otherwise known as fast food. The average check is under $6, while for Chipotle it's over $9. Sure, the two compete with each other indirectly, but not in the fast-casual way you might have thought. Think grilled KFC meets Taco Bell.
But what about future growth?
Chipotle ended last year with just under 1,600 restaurants. For 2014, it has guided for new openings of between 180 and 195 stores, or growth in terms of units in the neighborhood of 12%. It doesn't seem Chipotle is ready to slow down that pace, either. Ells stated in the most recent conference call:
New store opening volumes are very, very impressive, higher than they've ever been. And that gives us -- that along with the kind of teams we're seeing in our restaurants gives us confidence that we're developing Chipotle and opening new restaurants at a very responsible pace.
Then you have the El Pollo Loco pace. The company guided for between 13 and 15 new restaurants for fiscal 2014, or growth of between 3% and 4%. El Pollo Loco says in a filing with the SEC, "Over the long term, we plan to grow the number of El Pollo Loco restaurants by 8% to 10% annually." That planned pace is slower than Chipotle what is already doing now.
Wrapping it all up
As a starting point, El Pollo Loco trades at a P/E of around 67 based on the current share price and analyst estimates of $0.53 for fiscal year 2014. Chipotle Mexican Grill trades at a P/E of 50 based on the current share price and analyst estimates of $13.66 for fiscal year 2014.
Chipotle has a business model that has already proved to work nationally, has grown both unit sales and number of units at a far faster pace, and is expected to continue to grow at a far faster pace despite its already-larger size -- yet the stock trades at a cheaper P/E ratio based on today's earnings. I believe Chipotle is the one that deserves a higher P/E premium based on expected faster growth, and not the other way around. This makes Chipotle, hands down, the better buy of the two.
Nickey Friedman owns shares of Apple and Google. The Motley Fool recommends and owns shares of Apple, Chipotle Mexican Grill, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.