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El Pollo Loco Surges 41% in 1 Year: More Room for Growth?

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El Pollo Loco Holdings, Inc. (LOCO - Free Report) is currently one of the most impressive restaurant stocks and has the potential to carry on the momentum in the near term as well. Therefore, if you haven’t taken advantage of the share price appreciation yet, it’s time you add this stock to your portfolio.

Shares of El Pollo Loco have gained 41.2% in the past year, significantly outperforming the industry’s rally of 10.5%. Ongoing upward earnings estimate revisions also reflect optimism in the stock’s earnings prospects. Over the past 60 days, current year earnings estimates have inched up 1.4%.

Beside carrying a Zacks Rank #2 (Buy) at present, the restaurant has a VGM Score of A. Back-tested results show that stocks with a VGM Scores of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, handily outperform others.

Let’s delve deeper into the factors that make this stock a solid pick.

Top Line Gains From Sales-Building Initiatives

In order to drive revenue growth, El Pollo Loco focuses on expansion, and innovation across menu and ambiance. The company is opening all of its restaurants under the ‘Vision Design’ initiative. Restaurants under this program offer authentic atmosphere inspired by Mexico that includes El Pollo Loco’s menu and brand identity. Those restaurants also have an open-kitchen layout to display the preparation of the signature dish.

Moreover, expansion remains the utmost priority to fortify brand presence and drive incremental sales. The company plans to open eight company-owned and nine to 10 franchised restaurants in the current year. Meanwhile, the distinguished menu that is served in the restaurant also shows that the company is focusing on enriching guest experience to drive foot traffic and sales.

In fact, banking on these initiatives, El Pollo Loco witnessed year-over-year sales growth of 10.9% in the last reported quarter. Further, per the Zacks Consensus Estimate, current-year revenues are likely to grow 8.1% from the year ago quarter.

Franchise Model to Facilitate Earnings & Returns

El Pollo Loco carries out its business in a franchise model, which, we believe, reduces the company’s capital requirements and facilitates return on equity (ROE) as well as earnings per share growth.

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock price gains). In 2018, El Pollo Loco’s earnings per share are expected to grow 14.3%.

Meanwhile, El Pollo Loco delivered ROE of 9.8% in the trailing 12 months compared with 7.4% recorded by its industry. This supports the company’s immense growth potential and indicates that it reinvests more efficiently compared with its peers.

Valuation Looks Cogent

Looking at El Pollo Loco’s Price to Earnings Ratio (P/E) in the trailing 12 months, investors might be willing to pay more as the company is undervalued compared with its peers. Its P/E ratio for the trailing 12 months stands at 21.9 while that for the industry is 26.

Other Stocks to Consider

Investors can take a look at the following restaurant stocks, all of which currently carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

BJ’s Restaurants (BJRI - Free Report) , Dave & Buster’s (PLAY - Free Report) and Dunkin’ Brands (DNKN - Free Report) earnings for the current fiscal are projected to grow 66.7%, 6.2% and 16.9%, respectively.

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