William Blair Affirms Outperform On El Pollo Loco As Sales Trends Accelerate In 3Q14


In a research note issued Monday, William Blair analyst Sharon Zackfia maintained an Outperform rating on El Pollo Loco Holdings (NASDAQ:LOCO) as the company posted strong results for their third-quarter. No price target was assigned.

Zackfia wrote, “Sales trends have accelerated in the third quarter, with management expecting a 6.5% to 7.0% systemwide same-store sales gain against a 3.7% comparison (better than our 6% estimate). Third-quarter company-owned same-store sales guidance was set at 5.0% to 5.5% against a 2.2% comparison, with traffic trends accelerating somewhat from the second quarter. Guidance implies franchised comps will once again outpace company-owned comps, as has been the case for at least 10 straight quarters, with franchised comps implied at a 7% to 8% gain. We believe the continued relative outperformance of franchised locations serves as a positive indicator on El Pollo Loco’s growing brand awareness and acceptance in emerging markets, as roughly 40% of franchised locations are outside Los Angeles (versus about 20% of company-owned locations).”

Zackfia continued, “We expect investors will be heartened by El Pollo Loco’s accelerating comp trends into the third quarter. While El Pollo Loco’s stock trades at a premium multiple of 24 times our 2015 EBITDA estimate, we believe the valuation can be justified by the company’s leverage to ongoing secular trends in the restaurant industry that include 1) a rising appetite among consumers for healthier fare; 2) an increasing preference for fresh, hand-prepared, made-to-order menu items; and 3) the growing popularity of both chicken and Mexican cuisine in the United States. In addition, we are optimistic that ongoing menu innovation (such as the recent carne asada limited time offer) and upcoming easier comparisons could provide upside to estimates in the near term, with new unit maturation in new markets potentially adding an incremental comp tailwind to our estimates in future years (particularly 2016).”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Sharon Zackfia has a total average return of 21% and a 65% success rate. Zackfia has a 19.7% average return when recommending LOCO, and is ranked #427 out of 3273 analysts.

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