El Pollo LoCo Holdings Inc (NASDAQ: LOCO)’s Strong Opening Day

After their initial public offering, shares of El Pollo Loco (NASDAQ: LOCO) shot straight up. The company’s initial public offering sold 7.1 million shares for $15 each, valuing the shares at $540 million total. The company raised $107 million, with all of the funds benefiting the company and no shares being offered by selling shareholders.

Banks including Jefferies, Baird, and Morgan Stanley helped the company with the process to become a publicly traded firm.

El Pollo Loco is a rapidly growing fast food restaurant chain. The company runs in the limited service restaurant segment, and offers a combination of high quality food with convenience and food to provide an affordable and quick casual dining experience. The food is prepared in an open kitchen and is marketed to be a healthier alternative to other fast food establishments.

First opened in 1980, the restaurant chain has 401 locations in the states of Arizona, California, Nevada, Texas, and Utah.

The valuation for El Pollo Loco in relation to the market leader makes the company attractive to investors. However, the company has not shown real growth in its store and customer base. It is less profitable and is showing slower growth rate of store sales than the market leader.

Valuation

It is important to note that El Pollo Loco functions in the fast casual dining segment of the market, not the fast food segment. The average revenue that a fast food restaurant can expect to bring in from one sale is between $3 and $8, while that of a fast casual restaurant can expect between $8 and $12.

According to industry experts, the limited service restaurant business involves an upfront payment and average sales of $3 to $12. The industry revenue was $193 billion in total last year in 2013. Within that space, Mexican and chicken menus did well, driven by the large Hispanic demographic in the United States as well as the trend toward healthier fast food. According to the US Census Bureau, about 53 million residents of the United States are Hispanic, and that figure is slated to grow to 79 million by 2030.

El Pollo Loco faces intense competition in this specific portion of the market from Chipotle Mexican Grill (NYSE: CMG).

For last year 2013, El Pollo Loco posted sales of $314.7 million, which was a 7.2% increase from last year. However, the net loss was $16.9 million for 2013, which was a huge increase from the $7.9 million from the prior year.

Growth in revenue for the first quarter of this year 2014 was 5.8% to $81.4 million. The company improved its operating performance and decreased interest costs, which yielded a net profit of $5.5, compared to the break-even revenue last year.

Prior to the company’s IPO, El Pollo Loco operated with a total debt of $289 million. The funds from the IPO will knock off $107 million from that figure, and reduce the company’s debt to about $180 million.

After to its IPO, the company’s shares are now valued at $24.03 per share and the company’s valuation has climbed to $860 million. This means that the business is valued a 2.7 times its sales. If we take the $5.5 million from the profits in the first quarter as well as earnings that could increase to $25 to $30 million, the shares could trade at 30 times the company’s earnings.