El Pollo Loco: Short That Crazy Chicken!

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I never like to publicly insult a company or a product. Every business has people who try hard and work hard to make their company a success. So I hope that anyone involved with El Pollo Loco Holdings Inc (NASDAQ:LOCO) takes this as constructive criticism.

el pollo loco stockThe food stinks. The restaurants are filthy. There are competitors with better products.

If you’re an El Pollo Loco investor, that should give you concerns. Look at the financials and the valuation. If you are long LOCO stock, then you are loco.

Chicken restaurants have been all the rage for the past 20 years. I even lost my shirt in a regional chain called Koo-Koo-Roo that served a great product but was horribly mismanaged.

The issue with chicken is that the cluckers operate in a highly competitive environment and there is some, but not much, differentiation among the products. So you better make your chicken something special.

Buffalo Wild Wings (NASDAQ:BWLD) wrapped the chicken concept into its brand name, but the truth is that it is a sports bar with a huge menu that happens to include wings.

LOCO stock is a relic of the 1990s. The food isn’t keeping pace with the other options — as healthier alternatives have popped up, which also use chicken, competition just gets worse.

There’s also a significant problem with quality control. I’ve been to many El Pollo Loco restaurants here in southern California. I can’t say if they are different than other parts of the country, but the restaurants are routinely filthy — dirty floors, unkempt bathrooms and they just don’t smell very good. That kind of thing is something that a restaurant cannot afford to do in this kind of environment.

Then there’s the LOCO stock financial statements that show a company failing to grow quickly, and with a lot of other problems.

El Pollo Loco apparently used its $90 million in IPO proceeds to pay off a lot of debt. It still has $40 million in cash and $186 million in debt in the form of a first lien term loan. The interest payments aren’t too onerous, so that’s good news.

In the El Pollo Loco MRQ earnings report, revenue grew about 8% on impressive same-store sale comps of 7.9%. Expenses grew by 9%, though. When we back out the gain from the sale of restaurants, we see the ugly truth — operational profit rose only 2.9% from last year, to $11 million.

Back out interest and the net profit for the quarter is $7 million. That’s an annual run-rate of $28 million on a company with 37.2 million shares outstanding, or 75 cents per share on a stock trading at $26.

So LOCO stock trades at a price-to-earnings ratio of 35. On an absolute basis, it is as I said — loco.

On a relative basis, a true growth company like BWLD has $150 million in cash, no debt, trades at a PE of 30 with earnings growth of 25% to 30%.

So I say if you are loco, then hold El Pollo Loco stock. If you are sane, you will sell it, and short it if you can find shares.

As of this wrting, Lawrence Meyers had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/el-pollo-loco-short-that-crazy-chicken/.

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