Chickens can't fly, except for El Pollo Loco (NASDAQ:LOCO) stock, whose shares took off by 13% on Friday on the back of strong fourth quarter earnings and a promising outlook for 2015. And while El Pollo Loco can be a volatile stock, it also offers succulent upside potential over the long term.
Crazy chicken, crazy IPO
El Pollo Loco means "The Crazy Chicken" in Spanish, and the stock has made some really crazy movements since its IPO. From an IPO price of $15 in July 2014, El Pollo Loco rapidly exploded to over $42 per share, only to fall to nearly $20 by the end of last year as the company disappointed investors with its third-quarter results. After the big spike on Friday, El Pollo Loco stock is now trading around $27 per share.
This "loco" performance shows how wild expectations can create big swings on a stock price, especially when it comes to a relatively small company with a short track-record in the market. Many investors have compared El Pollo Loco to the extraordinarily successful Chipotle Mexican Grill (NYSE:CMG), and this has created some excessive expectations about the company.
El Pollo Loco specializes in fire-grill chicken recipes inspired in Mexican cuisine. The company is positioned as a healthier alternative to traditional fast-food chains such as KFC, and it has recently added new menu items with less than 500 calories, including the new Chicken & Shrimp Grilled Tostada, the Double Chicken Wet Burrito, a Grilled Chicken & Kale Salad, and the Skinny Chicken Quesadilla.
El Pollo Loco prices its menu marginally above fast food chains, but below most fast-casual competitors. Customers seem to appreciate this combination between value and quality, as the company has reported growing comparable-store sales for the last 14 quarters in a row.
Despite some similarities, the comparison with Chipotle may be over-exaggerated. Chipotle is arguably the most exceptional growth story in the restaurant business over the last several years. Chipotle practically invented the fast-casual category, and it continues delivering mind-blowing performance: sales grew 27.8%, reaching $4.11 billion in 2014.
While El Pollo Loco is no Chipotle, it's still a promising business with plenty of growth potential.
Total revenues during the 14-week period ended in December grew 18% to $90 million, versus $76.2 million in the 13-week period ended in December of 2013. On a comparable 13-week basis, total revenue increased 11.9%.
Company-operated restaurant revenue jumped 18% to $84.1 million, with approximately $4.6 million of that money coming from the extra week in 2014. Comparable company-operated restaurant sales in the fourth quarter increased 6.4%, driven by a 3.3% increase in average check and a 3.1% increase in traffic. Franchise revenue in the fourth quarter of 2014 grew 18.5% to $5.9 million, while franchised comparable restaurant sales increased 8.6%.
Profit margins are moving in the right direction; fourth quarter restaurant contribution increased 29.3% year over year to $18.8 million, and as a percent of company-operated restaurant sales, restaurant contribution margin improved 195 basis points to 22.3%.
Adjusted net income jumped 60.6% to $5.5 million, or $0.14 per diluted share. The number came in above expectations, as Wall Street was on average forecasting $0.12 in earnings per share.
Building out future growth
El Pollo Loco looks well positioned to continue delivering substantial growth over the years ahead. The company is on the right side of the trend when it comes to consumer demand, as healthier choices in the fast-casual segment are clearly outperforming traditional fast-food chains. Besides, the store base is relatively small, signaling that El Pollo Loco has abundant room for expansion. In fact, the company ended 2014 with 172 company-owned restaurants and 243 franchised locations, but management plans to open 16 new company-owned restaurants and 11 franchised restaurants during 2015, and it intends to deliver unit growth in the range of 8% to 11% over the long term.
Meanwhile, sales should continue growing at a strong rate on the back of growing comparable sales and an expanding store base. During the full year 2015 management is forecasting systemwide comparable restaurant sales growth of between 3% and 5%. In addition, earnings will most likely outgrow sales because of sales leverage and operational efficiencies as El Pollo Loco gains size over time. For 2015, adjusted earnings per share are forecasted to be between $0.67 and $0.71; this represents an annual increase in the range of 22% to 29% versus 2014.
The stock trades at a forward P/E ratio of 33.5 times earnings forecasts for the coming year, a premium versus the overall market. However, this doesn't look too excessive in comparison to other high-growth fast-casual restaurant chains. For reference, Chipotle Mexican Grill trades at a forward P/E ratio of 36.2, while Noodles & Company carries a forward P/E of 31.5.
Ultimately, El Pollo Loco is the first stages of what could be a massive growth opportunity in the long term, so the company could easily continue gain altitude over the coming years.