Over the past six months, El Pollo Loco’s stock price fell to $12.36. Shareholders have lost 8.8% of their capital, which is disappointing considering the S&P 500 has climbed by 8.9%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in El Pollo Loco, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even though the stock has become cheaper, we don't have much confidence in El Pollo Loco. Here are three reasons why you should be careful with LOCO and a stock we'd rather own.
Why Do We Think El Pollo Loco Will Underperform?
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, El Pollo Loco’s 1.3% annualized revenue growth over the last five years was weak. This fell short of our benchmarks. 
2. Fewer Distribution Channels Limit its Ceiling
With $471 million in revenue over the past 12 months, El Pollo Loco is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect El Pollo Loco’s revenue to rise by 2.2%, close to its 1.3% annualized growth for the past five years. This projection doesn't excite us and implies its newer menu offerings will not accelerate its top-line performance yet.
Final Judgment
El Pollo Loco falls short of our quality standards. After the recent drawdown, the stock trades at 30.1× forward EV-to-EBITDA (or $12.36 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. We’d recommend looking at our favorite semiconductor picks and shovels play.
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