Intrinsic value of El Pollo Loco Holdings - LOCO

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$12.50

  Intrinsic Value

$11.21

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  Rating & Target

hold

-10%

Previous close

$12.50

 
Intrinsic value

$11.21

 
Up/down potential

-10%

 
Rating

hold

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 2017), $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
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.70
  5.63
  5.57
  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
  5.11
  5.09
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
  5.04
  5.03
Revenue, $m
  425
  449
  474
  500
  527
  556
  586
  617
  650
  684
  720
  757
  797
  838
  881
  926
  974
  1,024
  1,076
  1,131
  1,188
  1,249
  1,312
  1,378
  1,448
  1,521
  1,598
  1,678
  1,763
  1,852
Variable operating expenses, $m
  384
  404
  425
  447
  470
  493
  518
  544
  571
  600
  598
  630
  662
  697
  733
  770
  810
  851
  895
  940
  988
  1,038
  1,091
  1,146
  1,204
  1,265
  1,329
  1,396
  1,466
  1,540
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
  384
  404
  425
  447
  470
  493
  518
  544
  571
  600
  598
  630
  662
  697
  733
  770
  810
  851
  895
  940
  988
  1,038
  1,091
  1,146
  1,204
  1,265
  1,329
  1,396
  1,466
  1,540
Operating income, $m
  40
  44
  49
  53
  58
  62
  67
  73
  78
  84
  121
  127
  134
  141
  148
  156
  164
  172
  181
  190
  200
  210
  221
  232
  244
  256
  269
  283
  297
  312
EBITDA, $m
  116
  123
  130
  137
  144
  152
  160
  169
  178
  187
  197
  207
  218
  229
  241
  253
  266
  280
  294
  309
  325
  341
  359
  377
  396
  416
  437
  459
  482
  506
Interest expense (income), $m
  3
  5
  6
  6
  7
  7
  8
  9
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  26
  27
  29
  30
  32
  34
  36
Earnings before tax, $m
  35
  39
  43
  46
  50
  55
  59
  64
  68
  73
  110
  115
  121
  127
  133
  140
  147
  154
  162
  170
  179
  187
  197
  206
  217
  227
  239
  251
  263
  276
Tax expense, $m
  10
  11
  11
  13
  14
  15
  16
  17
  18
  20
  30
  31
  33
  34
  36
  38
  40
  42
  44
  46
  48
  51
  53
  56
  59
  61
  64
  68
  71
  75
Net income, $m
  26
  28
  31
  34
  37
  40
  43
  46
  50
  54
  80
  84
  88
  93
  97
  102
  107
  113
  118
  124
  130
  137
  144
  151
  158
  166
  174
  183
  192
  201

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  468
  495
  522
  551
  581
  613
  646
  680
  716
  754
  793
  835
  878
  924
  971
  1,021
  1,074
  1,129
  1,186
  1,247
  1,310
  1,377
  1,446
  1,520
  1,597
  1,677
  1,762
  1,851
  1,944
  2,042
Adjusted assets (=assets-cash), $m
  468
  495
  522
  551
  581
  613
  646
  680
  716
  754
  793
  835
  878
  924
  971
  1,021
  1,074
  1,129
  1,186
  1,247
  1,310
  1,377
  1,446
  1,520
  1,597
  1,677
  1,762
  1,851
  1,944
  2,042
Revenue / Adjusted assets
  0.908
  0.907
  0.908
  0.907
  0.907
  0.907
  0.907
  0.907
  0.908
  0.907
  0.908
  0.907
  0.908
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
  0.907
Average production assets, $m
  446
  471
  498
  525
  554
  584
  615
  648
  682
  718
  756
  795
  836
  880
  925
  973
  1,023
  1,075
  1,130
  1,187
  1,248
  1,311
  1,378
  1,447
  1,520
  1,597
  1,678
  1,762
  1,851
  1,944
Working capital, $m
  -11
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -38
  -40
  -42
  -44
  -46
Total debt, $m
  103
  113
  124
  135
  146
  158
  170
  183
  197
  211
  226
  242
  258
  276
  294
  313
  333
  353
  375
  398
  422
  447
  474
  502
  531
  561
  593
  627
  662
  699
Total liabilities, $m
  178
  188
  198
  209
  220
  232
  245
  258
  271
  286
  301
  316
  333
  350
  368
  387
  407
  428
  450
  473
  497
  522
  548
  576
  605
  636
  668
  701
  737
  774
Total equity, $m
  291
  307
  324
  342
  361
  381
  401
  422
  445
  468
  493
  518
  545
  574
  603
  634
  667
  701
  737
  774
  814
  855
  898
  944
  991
  1,042
  1,094
  1,149
  1,207
  1,268
Total liabilities and equity, $m
  469
  495
  522
  551
  581
  613
  646
  680
  716
  754
  794
  834
  878
  924
  971
  1,021
  1,074
  1,129
  1,187
  1,247
  1,311
  1,377
  1,446
  1,520
  1,596
  1,678
  1,762
  1,850
  1,944
  2,042
Debt-to-equity ratio
  0.350
  0.370
  0.380
  0.390
  0.400
  0.410
  0.420
  0.430
  0.440
  0.450
  0.460
  0.470
  0.470
  0.480
  0.490
  0.490
  0.500
  0.500
  0.510
  0.510
  0.520
  0.520
  0.530
  0.530
  0.540
  0.540
  0.540
  0.550
  0.550
  0.550
Adjusted equity ratio
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621
  0.621

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  26
  28
  31
  34
  37
  40
  43
  46
  50
  54
  80
  84
  88
  93
  97
  102
  107
  113
  118
  124
  130
  137
  144
  151
  158
  166
  174
  183
  192
  201
Depreciation, amort., depletion, $m
  76
  78
  81
  84
  86
  89
  93
  96
  99
  103
  76
  80
  84
  88
  93
  97
  102
  107
  113
  119
  125
  131
  138
  145
  152
  160
  168
  176
  185
  194
Funds from operations, $m
  102
  107
  112
  117
  123
  129
  136
  142
  149
  156
  156
  164
  172
  181
  190
  200
  210
  220
  231
  243
  255
  268
  281
  295
  310
  326
  342
  359
  377
  396
Change in working capital, $m
  -1
  -1
  -1
  -1
  -1
  -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
Cash from operations, $m
  102
  107
  113
  118
  124
  130
  136
  143
  150
  157
  157
  165
  173
  182
  191
  201
  211
  221
  233
  244
  257
  269
  283
  297
  312
  328
  344
  361
  379
  398
Maintenance CAPEX, $m
  -42
  -45
  -47
  -50
  -52
  -55
  -58
  -61
  -65
  -68
  -72
  -76
  -80
  -84
  -88
  -93
  -97
  -102
  -107
  -113
  -119
  -125
  -131
  -138
  -145
  -152
  -160
  -168
  -176
  -185
New CAPEX, $m
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
  -38
  -39
  -41
  -43
  -45
  -48
  -50
  -52
  -55
  -58
  -60
  -63
  -66
  -70
  -73
  -77
  -81
  -85
  -89
  -93
Cash from investing activities, $m
  -66
  -70
  -73
  -77
  -81
  -85
  -89
  -94
  -99
  -104
  -110
  -115
  -121
  -127
  -133
  -141
  -147
  -154
  -162
  -171
  -179
  -188
  -197
  -208
  -218
  -229
  -241
  -253
  -265
  -278
Free cash flow, $m
  35
  37
  39
  41
  43
  45
  47
  49
  51
  53
  47
  50
  52
  55
  58
  61
  64
  67
  70
  74
  77
  81
  85
  90
  94
  99
  104
  109
  114
  120
Issuance/(repayment) of debt, $m
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
  35
  37
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
  35
  37
Total cash flow (excl. dividends), $m
  45
  47
  50
  52
  54
  57
  59
  62
  65
  67
  62
  65
  69
  72
  76
  80
  84
  88
  92
  97
  101
  107
  112
  117
  123
  129
  136
  142
  150
  157
Retained Cash Flow (-), $m
  -16
  -16
  -17
  -18
  -19
  -20
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -38
  -39
  -41
  -43
  -45
  -48
  -50
  -53
  -55
  -58
  -61
Prev. year cash balance distribution, $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 flow adjustment, $m
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  5
  5
Cash available for distribution, $m
  29
  31
  33
  34
  36
  37
  39
  40
  42
  44
  38
  40
  42
  44
  46
  48
  51
  54
  56
  59
  62
  65
  68
  72
  75
  79
  83
  87
  92
  96
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  28
  28
  28
  28
  28
  27
  26
  25
  24
  23
  18
  17
  16
  15
  14
  12
  11
  10
  9
  8
  6
  5
  4
  4
  3
  2
  2
  1
  1
  1
Current shareholders' claim on cash, %
  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
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El Pollo Loco Holdings, Inc. specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant (LSR) segment. The Company's menu features its signature product, citrus-marinated fire-grilled chicken, and a range of Mexican-inspired entrees that it creates from chicken. Every day in every restaurant, the Company marinates and fire-grills its chicken over open flames, and hand-slices whole tomatoes, avocados, serrano peppers and cilantro to make its salsas, guacamole and cilantro dressings from scratch. The Company also offers burritos, salads, tostadas, bowls, stuffed quesadillas and chicken entrees. The Company's entrees include Chicken Avocado Burrito, Under 500 Calorie entrees, Ultimate Pollo Bowl, and Stuffed Chicken Avocado Quesadilla. As of December 28, 2016, the Company had 460 restaurants, consisting of 201 Company-operated and 259 franchised restaurants. The Company also offers additional proteins, such as shrimp, carnitas and beef.

FINANCIAL RATIOS  of  El Pollo Loco Holdings (LOCO)

Valuation Ratios
P/E Ratio 26.7
Price to Sales 1.3
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 9.8
Price to Free Cash Flow 40.1
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
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 25.5%
Gross Margin - 3 Yr. Avg. 26.4%
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 $402 million for the last fiscal year's total revenue generated by El Pollo Loco Holdings. The default revenue input number comes from 2017 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 5.7% 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 4.3%, 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 90.9%.

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 5.4% 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 0.3%.

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 105%.

Life of production assets of 10 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 -2.5%. 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 - $275 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 38 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: 2Q Earnings Snapshot   [Aug-02-18 07:53PM  Associated Press]
▶ El Pollo Loco Q2 Earnings Preview   [07:59AM  Benzinga]
▶ Newly built property leased by El Pollo Loco sold for $2.38 million   [Jul-11-18 09:28AM  American City Business Journals]
▶ El Pollo Loco Shares May Soon Recover More Ground   [Jun-12-18 06:04PM  Motley Fool]
▶ El Pollo Loco: 1Q Earnings Snapshot   [05:01AM  Associated Press]
▶ How Small Investments Can Add Up to Big Bucks   [Apr-04-18 07:56PM  Zacks]
▶ Is It Safe to Buy El Pollo Loco Holdings, Inc?   [Mar-29-18 01:45PM  Motley Fool]
▶ El Pollo Loco unveils new logo, brings back tostadas   [Mar-14-18 06:15PM  American City Business Journals]
▶ El Pollo Loco Unveils New Logo   [Mar-12-18 01:50PM  GlobeNewswire]
▶ El Pollo Loco beats Street 4Q forecasts   [Mar-08-18 05:26PM  Associated Press]
▶ El Pollo Loco Q4 Earnings Preview   [09:28AM  Benzinga]
▶ El Pollo Loco Launches New Baja Shrimp Menu Items   [Feb-05-18 09:05AM  GlobeNewswire]
▶ El Pollo Loco reports 3Q loss   [05:38AM  Associated Press]
▶ Why El Pollo Loco Holdings Stock Dropped Today   [Nov-03-17 07:05PM  Motley Fool]
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