Wall Street Goes Loco for El Pollo Loco

LOCO stock has some nagging issues, but several long-term tailwinds as well

   

El Pollo Loco (LOCO), which operates a chain of more than 400 Tex-Mex fast food locations, made big news with a relatively small offering today.

El Pollo Loco Wall Street Goes Loco for El Pollo LocoThe El Pollo Loco IPO shot out of the gate with 28% returns for LOCO stock after issuing 7.1 million shares at $15 each, pulled off a successful IPO today.

The company issued 7.1 million shares at $15 each — the high end of the projected $13-$15 range — and including overallotment, the El Pollo Loco is valued around $123 million.

Here’s a quick look at the offering — good, bad and ugly.

El Pollo Loco – The Good

El Pollo Loco targets a blend of the quick-service and fast-casual restaurant segments, serving up typical Tex-Mex dishes such as burritos, tostadas and quesadillas. It has the advantage of being both fairly affordable and fast; the per-person spend is about $5.83, while the wait time is roughly four minutes.

LOCO stock primarily is a play on the growth of America’s Hispanic population. According to the U.S. Census Bureau, it’s expected to grow from 50.5 million in 2009 to 78.7 million by 2030 — which will put the population percentage from 16.3% of the country’s overall headcount in 2011 to about 21.9% in 2030. El Pollo Loco also is hoping to grab a small bite of the healthy-eating crowd via its “Under 500 Calorie” menu.

Performance has been solid — El Pollo Loco has posted positive comparable-store sales for 11 consecutive quarters, and in Q1 of this year, its growth rate was an impressive 7.2%.

Attractive restaurant economics also come into play, with a typical location requiring an investment of $1.36 million, but yielding a cash return of about 25% by the third full year.

El Pollo Loco – the Bad

Investors still should be aware of some issues.

First, and certainly significant, El Pollo Loco has a long history of losses, including $16.9 million in the red last year and $7.9 million in bleeding in 2012. Though LOCO stock is projected to post a modest profit for the current year.

El Pollo is also highly concentrated geographically; about 80% of revenues come from the Los Angeles area! Thus, local problems could have a disproportionate effect on the food chain.

That’s not an unfounded issue, either. From the S-1:

“During the recent economic crisis and recession, our business was materially adversely affected by a significant decrease in revenues from these restaurants due to adverse economic conditions in Southern California, including declining home prices and increased foreclosures. Adverse changes in demographic, unemployment, economic or regulatory conditions in the greater Los Angeles area or the State of California, including but not limited to enforcement policies for and changes in immigration law, have had and may continue to have material adverse effects on our business.”

072514 restaurant stocks Wall Street Goes Loco for El Pollo LocoBut perhaps the biggest factor to consider is the curse of hot restaurant IPOs. Look at some recent deals:

For the most part, the sector is often a magnet for excitement and hype. But as time goes by, valuations generally erode, especially as it gets tough to meet the earnings expectations.

Bottom Line

While the El Pollo Loco IPO did not have a ridiculous first-day spike, the stock move was still robust.

LOCO stock might be tasty, but if history is any guide, there’s a good bet you can get a better valuation if you wait.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/el-pollo-loco-ipo-stock/.

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