El Pollo Loco's Crazy Freshman Year as a Public Company

An El Pollo Loco Restaurant in Upland California USA
John Crowe/Alamy

One of the more volatile initial public offerings over the past year just keeps on clucking. Shares of El Pollo Loco (LOCO) moved sharply higher on Friday morning after posting better-than-expected quarterly results.

Revenue clocked in at $90 million, 18 percent ahead of the prior year's fourth quarter. There was an extra week this time around, naturally juicing up the top line. Sales would have moved just 12 percent higher on a comparable basis, but that's still pretty encouraging. El Pollo Loco's pro forma profit rose 61 percent to $0.14 a share. Analysts were only holding out for 12 cents a share in earnings on $87.5 million in revenue. It's the first time in its first three quarters as a public company that it has landed ahead of Wall Street profit targets.

The chain of 415 quick-service restaurants specializing in grilled citrus-marinated chicken is in a good groove. Comparable-restaurant sales climbed 6.4 percent during the holiday quarter, fueled by a 3.1 percent uptick in traffic and a 3.3 percent increase in what the average guest was spending. Franchised locations -- and 243 of the restaurants are owned by franchisees -- grew even faster.

Fowl Play

Investors got their first taste of El Pollo Loco when it went public at $15 last summer. It wasn't the first time that the chain attempted to go public. It tried to give it a go in 2006 when it had 347 locations, but the offering was withdrawn given the market's lukewarm reception.

The market was far more excited this time around. The stock opened at $19 on its first trading day in July, and by the end of its second day of trading the shares had soared to close at $34.48. El Pollo Loco's stock would go on to peak at $41.70, but it was all downhill from there. The stock went on to shed more than half of its value, falling to the high teens by the end of the year.

A lofty valuation and merely meeting expectations likely led to the gradual decline through the final five months of 2014, after the stock skyrocketed through its first week of trading. It also didn't help that other recent fast-casual dining chains were imploding. Pasta tosser Noodles & Co. (NDLS) and sandwich baker Potbelly (PBPB) were some of 2013's hottest debutantes, but the stocks plunged 27 percent and 47 percent, respectively, through 2014.

Playing Chicken

Unlike Noodles & Co. and Potbelly, El Pollo Loco's store-level popularity has held up pretty well. Comps rose 5.8 percent last year, and that was on top of a 5.3 percent climb through 2013.

Its outlook for the year ahead is encouraging. It expects to open 16 restaurant, with franchisees expanding their reach by another 11 locations. El Pollo Loco sees comparable-restaurant sales climbing between 3 percent and 5 percent, and adjusted earnings per share should clock in between 67 cents and 71 cents. The midpoint of that range is just ahead of where analysts were parked, and the combination of expansion and positive comps should result in slightly better growth than the 8 percent ascent that Wall Street's forecasting.

It won't be easy. The stock still trades at a hefty premium to the market. However, as one of the fast-casual chains where the fundamentals continue to improve, it's not a surprise that El Pollo Loco's stock was already beating the market in 2015 before Thursday afternoon's well-received report. We've experienced the quick rise of El Pollo Loco and the gradual yet sharp fall that followed. The right ingredients are in place for this to be a slow yet gradual rise in 2015, but El Pollo Loco will need to keep getting things right.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.