El Pollo LoCo Holdings Inc Valuation – Initial Coverage $LOCO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how El Pollo LoCo Holdings Inc (LOCO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): El Pollo Loco Holdings, Inc. is a restaurant concept that offers fire-grilling citrus-marinated chicken. The Company operates in the limited service restaurant segment. The Company’s activities are conducted through its subsidiary, El Pollo Loco, Inc. (EPL), which develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco. The restaurants are located in California, Arizona, Nevada, Texas and Utah. The Company offers flame-grilled chicken in a range of contemporary Mexican-influenced entrees, including specialty chicken burritos, chicken quesadillas, chicken tortilla soup, Pollo Bowls and Pollo Salads. The Company operates approximately 190 and franchises over 250 El Pollo Loco restaurants. In addition, the Company licenses approximately two restaurants in the Philippines. The Company serves individual and family-sized chicken meals, a range of Mexican-inspired entrees and sides. It offers alternative proteins, such as shrimp, carnitas and beef.

LOCO Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of LOCO – April 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $440,763,196 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.79 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 5700.00% Pass
6. Moderate PEmg Ratio PEmg < 20 19.59 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.71 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.79 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -11.03 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $0.59
MG Growth Estimate 15.00%
MG Value $22.79
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $8.58
MG Value based on 0% Growth $5.03
Market Implied Growth Rate 5.55%
Current Price $11.60
% of Intrinsic Value 50.90%

El Pollo LoCo Holdings Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $-0.27 in 2013 to an estimated $0.59 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.55% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into El Pollo LoCo Holdings Inc revealed the company was trading above its Graham Number of $10.04. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 19.59, which was below the industry average of 33.24, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-4.36.

El Pollo LoCo Holdings Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$4.36
Graham Number $10.04
PEmg 19.59
Current Ratio 0.79
PB Ratio 1.71
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0


Useful Links:

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $35,885,000
Total Current Liabilities $45,318,000
Long-Term Debt $104,000,000
Total Assets $471,305,000
Intangible Assets $311,046,000
Total Liabilities $206,123,000
Shares Outstanding (Diluted Average) 39,027,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.65
Dec2016 $0.47
Dec2015 $0.62
Dec2014 $1.24
Dec2013 -$0.59
Dec2012 -$0.27

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.59
Dec2016 $0.47
Dec2015 $0.38
Dec2014 $0.20
Dec2013 -$0.27
Dec2012 -$0.09

Recommended Reading:

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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