UPDATE: William Blair Starts El Pollo Loco (LOCO) at Outperform

(Updated - August 19, 2014 10:12 AM EDT)

William Blair initiated coverage on El Pollo Loco (NASDAQ: LOCO) with an Outperform rating. Analyst Sharon Zackfia noted El Pollo Loco's distinct concept, and he expect mid-teens net income growth annually over the next three years.

"As a result of repositioning efforts begun in 2012, we believe the concept is poised to benefit from a number of trends that continue to sweep across the restaurant industry, including 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," said Zackfia.

"With annual unit volumes of roughly $1.8 million by year three, El Pollo Loco restaurants are targeted to achieve cash-on-cash returns above 30%, and both the classes of 2012 and 2013 exceeded this target with returns in excess of 35% at company-owned locations. With 88% of the current restaurant base in California, we believe plenty of room exists to grow the system throughout the rest of the country, with our saturation analysis suggesting the potential for more than 1,600 locations predicated on one-half the penetration already achieved in California. Notably, management estimates the company can open another 325 locations in existing markets, including more than 200 additional locations in California," continued the analyst.

"We expect high-single-digit revenue growth annually rising to low-double-digit territory as expansion accelerates from a low- to mid-single-digit pace to an 8% to 10% pace by 2016. We project continued improvement in restaurant-level margins on fixed cost
leverage and purchasing efficiencies, albeit at a lesser pace than the last few years, given inherent costs associated with accelerating unit development," he added.

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 $33.20 yesterday.

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