Can El Pollo Loco Keep It Up After Last Week's 19% Pop?

The rotisserie chicken chain moves higher after a welcome analyst move.

Rick Munarriz
Rick Munarriz
Oct 12, 2015 at 11:00AM
Consumer Goods

Source: El Pollo Loco.   

Chicken is flying at El Pollo Loco Holdings (NASDAQ:LOCO), and at least one Wall Street pro is noticing. Shares of the restaurant chain specializing in citrus-marinated rotisserie chicken soared 19% last week, fueled largely by SunTrust Robinson Humphrey analyst Jake Bartlett initiating coverage of El Pollo Loco with a bullish buy rating.

Bartlett feels that the eatery's brisk expansion and his own forecast for accelerating comps growth bode well for the stock. He is setting a price target of $17. That would have come off as bearish 14 months ago when the stock was peaking at $41.90, but it's a different story now that El Pollo Loco has fallen out of favor. The stock kicked off last week in the pre-teens before finally breaking into the teens shortly after Bartlett's upgrade. Friday represented the first time that the stock was being bought and sold in the teens in 27 trading days. 

Bartlett's price target is so ambitious that it translates into 31% in upside, and that's on top of last week's 19% spike. Then again, it could also be a sobering reminder to anyone that chased the stock higher following its Wall Street debut. 

Shares of El Pollo Loco were on fire -- and not just the rotisserie-roasting kind -- when it went public at $15 last summer. It opened at $19, closed at $24.04, and five trading days later was trading north of $40. It was all downhill from there. 

It's not El Pollo Loco's fundamentals that have faltered. It has actually surpassed Wall Street's profit forecasts in its past three quarters. Popularity at the individual eatery level has been consistently robust. Comps rose 5.3% in 2013 and 5.8% last year. Growth has decelerated so far in 2015, but El Pollo Loco is still on a hot streak of 16 consecutive quarters of growth in systemwide comps.

El Pollo Loco went public after posting three years of modest deficits, but it was quite profitable last year with improving bottom-line results so far this year. El Pollo Loco may not have all of the characteristics of a market darling, but it doesn't deserve to be a busted IPO. It could be that investors are just chicken when it comes to chicken restaurant stocks.   

Rotisserie chicken has historically been a lousy investment. Chains including Clucker's, Koo Koo Roo, Boston Chicken (now Boston Market), and Pollo Tropical failed to impress Mr. Market in their privately traded tenures. Many of these chains have been all but wiped from this planet. Remember Kenny Rogers Roasters? You'll have to head out to the Ontario Mills shopping mall in California to hit up the only remaining stateside location.  

The good news for El Pollo Loco's shareholders is that the stock is reasonably cheap at these levels. The stock is fetching 19 times this year's projected profitability and less than 17 times next year's target. There are also just 418 locations out there, leaving plenty of room for expanding into new markets. The consumer hunger is there. We see that in the consistently positive comps over the past four years. With Bartlett and others seeing accelerating sales growth next year this busted IPO won't be broken for too much longer.