El Pollo Loco: Too Crazy Ahead of Earnings?

Tomorrow after the market closes, El Pollo Loco (LOCO) will announce its first earnings report since going public in July. The company, which operates more than 400 Tex-Mex fast food locations, has benefited from the buzz that it could be the next Chipotle (CMG).

el pollo loco stockYet investors may be getting carried away. After all, LOCO stock is already up a sizzling 140%.

El Pollo Loco is a blend of the quick-service and fast-casual restaurant segments, serving up dishes such as burritos, tostadas and quesadillas. There are also “5 Under 500 Calories” menu items, which caters to those who want healthier fare. Oh, and El Pollo Loco is affordable, with an average per-person spend of about $5.83.

As for the upcoming earnings report, the Wall Street consensus for El Pollo Loco is to post earnings of 16 cents per share on revenues $86.44 million, up from $81.4 million in the same period a year ago.  This is essentially in line with the company’s own guidance, which calls for revenues of $86 million to $86.9 million in the S-1.

Despite all this, there is still lots of skepticism over El Pollo Loco. According to a report in The Wall Street Journal, roughly about 15% of the float is short. That means a lot of people are expecting LOCO stock to fall.

And yes, it has generally been smart to be on the short-side of high-flying restaurant IPOs. Just take a look at the performances of the following:

  • Papa Murphy’s (FRESH) has fallen 20% from its IPO price
  • Noodles & Company (NDLS) has dropped 50%
  • And Potbelly (PBPB) is down a staggering 60% since its IPO

But short sellers aren’t the only ones who are dour on LOCO. So are the analysts from the company’s own underwriters. Their average rating is a “hold,” and the price target is roughly $28 per share — a 20% drop from the current price of LOCO stock.

The concern? Valuation. Consider that the forward price-to-earnings ratio is a hefty 59 for El Pollo Loco, compared to 39 for CMG and 31 for Fiesta Restaurant Group (FRGI). In other words, LOCO stock is already factoring in tremendous growth potential.

Of course, the company could still meet its estimates for this quarter. The general rule of IPOs is to only go public when you’re sure to have a solid first quarter. As for El Pollo Loco, it helps that the Wall Street expectations are not far off from the company’s own estimates.

If anything, LOCO stock could have another spike if there is a beat. There are only 7.1 million shares on the market, so even moderate buying can push the stock up. Besides, short sellers may be forced to cover their shares, causing a “short squeeze” that could send the price up.

But the fact remains that LOCO stock is really for traders who know how to play volatile stocks, not for investors who take a buy-and-hold approach. Again, as seen with other stocks like NDLS and PBPB, it’s tough to keep up with heady expectations over a period of years. And just one miss can mean a plunge in the stock price.

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.


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