Intrinsic value of El Pollo Loco Holdings - LOCO

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$12.25

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$12.25

 
Intrinsic value

$20.20

 
Up/down potential

+65%

 
Rating

str. buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of LOCO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.04
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.77
  5.70
  5.63
  5.56
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.10
  5.09
Revenue, $m
  380
  407
  434
  463
  493
  524
  556
  590
  625
  662
  700
  740
  782
  825
  871
  918
  968
  1,020
  1,074
  1,131
  1,191
  1,253
  1,319
  1,387
  1,459
  1,534
  1,613
  1,696
  1,783
  1,874
  1,969
Variable operating expenses, $m
 
  349
  371
  394
  418
  443
  469
  496
  524
  553
  583
  590
  623
  658
  694
  732
  772
  813
  857
  902
  950
  999
  1,052
  1,106
  1,163
  1,224
  1,286
  1,352
  1,422
  1,494
  1,570
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  345
  349
  371
  394
  418
  443
  469
  496
  524
  553
  583
  590
  623
  658
  694
  732
  772
  813
  857
  902
  950
  999
  1,052
  1,106
  1,163
  1,224
  1,286
  1,352
  1,422
  1,494
  1,570
Operating income, $m
  35
  57
  63
  69
  75
  81
  88
  95
  102
  109
  117
  150
  158
  167
  176
  186
  196
  207
  218
  229
  241
  254
  267
  281
  295
  311
  327
  343
  361
  379
  399
EBITDA, $m
  51
  89
  95
  102
  108
  115
  122
  130
  137
  146
  154
  163
  172
  181
  191
  202
  213
  224
  236
  249
  262
  276
  290
  305
  321
  337
  355
  373
  392
  412
  433
Interest expense (income), $m
  3
  4
  4
  5
  5
  6
  6
  7
  8
  8
  9
  10
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  26
  27
  29
  30
  32
Earnings before tax, $m
  31
  54
  59
  64
  70
  75
  81
  88
  94
  101
  108
  140
  148
  156
  164
  173
  182
  192
  202
  212
  223
  235
  247
  259
  273
  287
  301
  316
  332
  349
  367
Tax expense, $m
  13
  15
  16
  17
  19
  20
  22
  24
  25
  27
  29
  38
  40
  42
  44
  47
  49
  52
  54
  57
  60
  63
  67
  70
  74
  77
  81
  85
  90
  94
  99
Net income, $m
  18
  39
  43
  47
  51
  55
  59
  64
  69
  74
  79
  102
  108
  114
  120
  126
  133
  140
  147
  155
  163
  171
  180
  189
  199
  209
  220
  231
  243
  255
  268

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  471
  502
  536
  572
  609
  647
  687
  729
  772
  817
  864
  914
  965
  1,019
  1,075
  1,134
  1,195
  1,259
  1,326
  1,396
  1,470
  1,547
  1,628
  1,713
  1,801
  1,894
  1,992
  2,094
  2,201
  2,313
  2,431
Adjusted assets (=assets-cash), $m
  469
  502
  536
  572
  609
  647
  687
  729
  772
  817
  864
  914
  965
  1,019
  1,075
  1,134
  1,195
  1,259
  1,326
  1,396
  1,470
  1,547
  1,628
  1,713
  1,801
  1,894
  1,992
  2,094
  2,201
  2,313
  2,431
Revenue / Adjusted assets
  0.810
  0.811
  0.810
  0.809
  0.810
  0.810
  0.809
  0.809
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
Average production assets, $m
  174
  186
  198
  212
  225
  239
  254
  270
  286
  303
  320
  338
  357
  377
  398
  420
  442
  466
  491
  517
  544
  573
  603
  634
  667
  701
  737
  775
  815
  856
  900
Working capital, $m
  -9
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
  -57
Total debt, $m
  104
  118
  133
  149
  165
  182
  200
  218
  237
  257
  277
  299
  322
  345
  370
  396
  423
  451
  480
  511
  543
  577
  613
  650
  689
  730
  772
  817
  864
  913
  965
Total liabilities, $m
  206
  220
  235
  251
  267
  284
  302
  320
  339
  359
  379
  401
  424
  447
  472
  498
  525
  553
  582
  613
  645
  679
  715
  752
  791
  832
  874
  919
  966
  1,015
  1,067
Total equity, $m
  265
  282
  301
  321
  341
  363
  385
  409
  433
  458
  485
  513
  541
  572
  603
  636
  670
  706
  744
  783
  825
  868
  913
  961
  1,010
  1,063
  1,117
  1,175
  1,235
  1,298
  1,364
Total liabilities and equity, $m
  471
  502
  536
  572
  608
  647
  687
  729
  772
  817
  864
  914
  965
  1,019
  1,075
  1,134
  1,195
  1,259
  1,326
  1,396
  1,470
  1,547
  1,628
  1,713
  1,801
  1,895
  1,991
  2,094
  2,201
  2,313
  2,431
Debt-to-equity ratio
  0.392
  0.420
  0.440
  0.460
  0.480
  0.500
  0.520
  0.530
  0.550
  0.560
  0.570
  0.580
  0.590
  0.600
  0.610
  0.620
  0.630
  0.640
  0.650
  0.650
  0.660
  0.670
  0.670
  0.680
  0.680
  0.690
  0.690
  0.700
  0.700
  0.700
  0.710
Adjusted equity ratio
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561
  0.561

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  18
  39
  43
  47
  51
  55
  59
  64
  69
  74
  79
  102
  108
  114
  120
  126
  133
  140
  147
  155
  163
  171
  180
  189
  199
  209
  220
  231
  243
  255
  268
Depreciation, amort., depletion, $m
  16
  32
  32
  33
  33
  34
  35
  35
  36
  36
  37
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  29
  31
  32
  34
Funds from operations, $m
  45
  71
  75
  80
  84
  89
  94
  99
  104
  110
  116
  115
  121
  128
  135
  142
  150
  158
  166
  175
  184
  193
  203
  213
  224
  236
  248
  260
  274
  287
  302
Change in working capital, $m
  -4
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
Cash from operations, $m
  49
  79
  76
  81
  85
  90
  95
  100
  105
  111
  117
  116
  123
  129
  136
  144
  151
  159
  167
  176
  185
  195
  205
  215
  226
  238
  250
  263
  276
  290
  305
Maintenance CAPEX, $m
  0
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -32
New CAPEX, $m
  -37
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
  -38
  -40
  -42
  -44
Cash from investing activities, $m
  -35
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -28
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -50
  -52
  -54
  -57
  -59
  -63
  -66
  -69
  -73
  -76
Free cash flow, $m
  14
  61
  57
  60
  64
  67
  71
  75
  79
  83
  88
  86
  91
  96
  101
  107
  113
  119
  125
  132
  139
  146
  153
  161
  170
  178
  187
  197
  207
  218
  229
Issuance/(repayment) of debt, $m
  -19
  14
  15
  16
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  34
  35
  37
  39
  41
  43
  45
  47
  49
  52
Issuance/(repurchase) of shares, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -18
  14
  15
  16
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  34
  35
  37
  39
  41
  43
  45
  47
  49
  52
Total cash flow (excl. dividends), $m
  -4
  75
  72
  76
  80
  84
  89
  93
  98
  103
  109
  108
  113
  119
  126
  133
  140
  147
  154
  162
  171
  180
  189
  198
  209
  219
  230
  242
  254
  267
  280
Retained Cash Flow (-), $m
  -20
  -19
  -19
  -20
  -21
  -22
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -38
  -39
  -41
  -43
  -45
  -47
  -50
  -52
  -55
  -57
  -60
  -63
  -66
Prev. year cash balance distribution, $m
 
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  58
  52
  56
  59
  63
  66
  70
  74
  78
  82
  80
  85
  89
  94
  100
  105
  111
  117
  123
  130
  136
  143
  151
  159
  167
  176
  185
  194
  204
  214
Discount rate, %
 
  4.70
  4.94
  5.18
  5.44
  5.71
  6.00
  6.30
  6.61
  6.94
  7.29
  7.66
  8.04
  8.44
  8.86
  9.31
  9.77
  10.26
  10.77
  11.31
  11.88
  12.47
  13.09
  13.75
  14.44
  15.16
  15.92
  16.71
  17.55
  18.42
  19.35
PV of cash for distribution, $m
 
  56
  48
  48
  48
  47
  47
  46
  44
  43
  41
  36
  33
  31
  29
  26
  24
  21
  19
  16
  14
  12
  10
  8
  6
  5
  4
  3
  2
  2
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

El Pollo Loco Holdings, Inc., through its subsidiary, El Pollo Loco, Inc., develops, franchises, licenses, and operates quick-service restaurants under the El Pollo Loco name in the United States. The company offers individual and family-sized chicken meals, Mexican-inspired entrees, sides, and, alternative proteins. As of February 20, 2017, it had approximately 460 company-owned and franchised restaurants in Arizona, California, Nevada, Texas, and Utah. The company was formerly known as Chicken Acquisition Corp. and changed its name to El Pollo Loco Holdings, Inc. in April 2014. El Pollo Loco Holdings, Inc. was founded in 1980 and is headquartered in Costa Mesa, California.

FINANCIAL RATIOS  of  El Pollo Loco Holdings (LOCO)

Valuation Ratios
P/E Ratio 26.2
Price to Sales 1.2
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 9.6
Price to Free Cash Flow 39.3
Growth Rates
Sales Growth Rate 7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 19.4%
Cap. Spend. - 3 Yr. Gr. Rate 21.5%
Financial Strength
Quick Ratio NaN
Current Ratio 0.5
LT Debt to Equity 39.2%
Total Debt to Equity 39.2%
Interest Coverage 11
Management Effectiveness
Return On Assets 4.2%
Ret/ On Assets - 3 Yr. Avg. 3.4%
Return On Total Capital 4.9%
Ret/ On T. Cap. - 3 Yr. Avg. 7.7%
Return On Equity 7.1%
Return On Equity - 3 Yr. Avg. 16.7%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 46.1%
Gross Margin - 3 Yr. Avg. 46.5%
EBITDA Margin 13.2%
EBITDA Margin - 3 Yr. Avg. 11.2%
Operating Margin 9.2%
Oper. Margin - 3 Yr. Avg. 11.5%
Pre-Tax Margin 8.2%
Pre-Tax Margin - 3 Yr. Avg. 4.9%
Net Profit Margin 4.7%
Net Profit Margin - 3 Yr. Avg. 7.9%
Effective Tax Rate 41.9%
Eff/ Tax Rate - 3 Yr. Avg. 129.5%
Payout Ratio 0%

LOCO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LOCO stock intrinsic value calculation we used $380 million for the last fiscal year's total revenue generated by El Pollo Loco Holdings. The default revenue input number comes from 2016 income statement of El Pollo Loco Holdings. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LOCO stock valuation model: a) initial revenue growth rate of 7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.7%, whose default value for LOCO is calculated based on our internal credit rating of El Pollo Loco Holdings, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of El Pollo Loco Holdings.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LOCO stock the variable cost ratio is equal to 86.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for LOCO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for El Pollo Loco Holdings.

Corporate tax rate of 27% is the nominal tax rate for El Pollo Loco Holdings. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LOCO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LOCO are equal to 45.7%.

Life of production assets of 26.4 years is the average useful life of capital assets used in El Pollo Loco Holdings operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LOCO is equal to -2.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $265 million for El Pollo Loco Holdings - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 37.997 million for El Pollo Loco Holdings is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of El Pollo Loco Holdings at the current share price and the inputted number of shares is $0.5 billion.


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COMPANY NEWS

▶ El Pollo Loco CEO to retire   [Mar-10-17 03:45PM  at bizjournals.com]
▶ El Pollo Loco CEO to retire   [03:45PM  American City Business Journals]
▶ El Pollo Loco Unveils Four New Baja Shrimp Items   [Feb-06-17 09:00AM  GlobeNewswire]
▶ Is El Pollo LoCo Holdings Inc (LOCO) A Good Stock To Buy?   [Dec-12-16 08:30PM  at Insider Monkey]
▶ El Pollo Loco Launches Online Ordering and Mobile App   [Dec-01-16 09:00AM  GlobeNewswire]
▶ Why Shares of El Pollo Loco Tumbled Today   [12:42PM  at Motley Fool]
▶ El Pollo Loco Names Vitro Creative Agency of Record   [Oct-12-16 09:00AM  GlobeNewswire]
Stock chart of LOCO Financial statements of LOCO
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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