El Pollo Loco (LOCO) Should Be Bought Aggressively, Says Stifel; Stock Upgraded to Buy

(Updated - August 28, 2015 9:46 AM EDT)

Stifel upgraded El Pollo Loco (NASDAQ: LOCO) from Hold to Buy with a price target of $17. Analyst Paul Westra urged clients to aggressively buy the stock and said, at $12 per share, investors are paying zero for El Pollo Loco’s future growth option. He also noted its risk-free franchise-growth option alone is worth $5 per share.

Westra explained, "We upgrade our rating on LOCO to Buy from Hold based on a generally bullish view of all three parts of our Stifel Investment Thesis Framework, including: (1) The LOCO Stock Story, where LOCO’s current share price of $12/sh adheres zero value for LOCO’s growth option; (2) The El Pollo Loco Concept Story, where El Pollo Loco benefits from its dinner-centric QSR-Plus market positioning and the growing attachment to Mexican cuisine; and (3) The LOCO Company Story, where LOCO’s strong, operations-focused management team has demonstrated flexibility by making quick adjustments to LOCO’s value proposition to reverse recent traffic trends."

"Over the past 20 years, generally speaking, valuations of zero-growth restaurant companies have tended to bottom out at around 4 times store-level cash flow – which, for LOCO, equates to $12/sh using 2016 store-level profits of ~$105mmE," continued the analyst. "The return-on-capital hurdle for franchisees is generally much lower than for company-store divisions (as independent companies can lever-up higher to ~80% and run leaner overhead organizations (without public-company expenses as well)). So, even conservatively speaking, we comfortably value LOCO’s US franchise-growth option at $5/sh (assumes +600 future stores over next twenty years (or 20/yr))."

Westra added, "LOCO’s company-store growth option worth between $0/sh to $10/sh: LOCO’s existing store base earns a real return-on-equity (ROE) of +9%A. Going forward, we would value LOCO’s company-store growth option between $0/sh (if new LOCO company stores end up earning ROEs of +7% or less (real cost-of-equity)); and $10/sh (based on “full success” where new stores earn ROEs of +14%)."

For an analyst ratings summary and ratings history on El Pollo Loco click here. For more ratings news on El Pollo Loco click here.

Shares of El Pollo Loco closed at $12.62 yesterday.

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