El Pollo Loco Holdings Inc Tumbles On Bearish Coverage

El Pollo Loco Holdings Inc Tumbles On Bearish Coverage

El Pollo LoCo Holdings Inc (NASDAQ:LOCO) nearly tripled in the week following its recent IPO, jumping from an opening price of $15 to more than $41 as investors wondered if it might be the next Chipotle Mexican Grill, Inc. (NYSE:CMG). But now that the shine has worn off and analysts have issued a string of Sell and Hold ratings, LOCO has dropped 10% as investors reassess the restaurant chain’s poor financial record.

Price targets range from $22 to $32, El Pollo LoCo at $30

Morgan Stanley analyst John Glass is more pessimistic than most of his peers, giving El Pollo LoCo Holdings Inc (NASDAQ:LOCO) a $22 price target based on 37x 2015E EPS, compared to a 39x multiple for competitor Chipotle Mexican Grill, Inc. (NYSE:CMG) and 32x for Fiesta Restaurant Group Inc (NASDAQ:FRGI), reports Ben Eisen for MarketWatch. Other analysts have set price targets near $30, in line with LOCO’s stock price now that it has deflated a bit.

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But these analysts are assuming El Pollo LoCo Holdings Inc (NASDAQ:LOCO) will turn a hefty profit in 2015, something it hasn’t done on an annual basis for seven years. The restaurant was profitable last quarter, but one solid quarter following years of losses means this is still a fairly speculative stock. It doesn’t help that the IPO was more of a financial necessity than a decision to take a booming business public. LOCO’s losses actually doubled from 2012 to 2013, which the company attributes to paying off part of its debt early. That would be more acceptable if it meant that LOCO was left with a healthy balance sheet, but there’s still plenty left to deal with.

“With $288.8 million in accumulated debt, El Pollo Loco has to use its IPO proceeds to pay off a loan. There’s no money here to fuel expansion, and the cost of debt service is hobbling its progress, the company admits in its IPO filing,” explained Carol Tice at Forbes at the time of the IPO.

Failed expansion calls growth story into question

The argument in favor of El Pollo LoCo Holdings Inc (NASDAQ:LOCO) is that it’s a growth stock that has lost money while fueling growth, and that last quarter’s profits show that it is now turning that growth into profits. The problem, as Tice pointed out, is that all 12 of the stores opened east of the Rockies by 2009 had gone out of business by 2012. A growth stock that has had trouble expanding should worry investors, something the market may just be realizing.

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