Is It Time To Get Crazy With El Pollo Loco Stock?The company's core market is L.A., but it has been branching out into other areas and on the brink of a major growth accelerating.

El Pollo Loco (NASDAQ:LOCO) is an interesting play on fast food. The company's core market is L.A. but it has been branching out into other areas and on the brink of a major growth accelerating. Over the past two years, the company executed and completed what they call the "Transformation Agenda" and is ready to begin a three-year "Acceleration Agenda" that should put the company inthe national spotlight. The key highlight of the transformation and acceleration plans is the shift away from company-owned stores and L.A.-centric business into a franchise-driven model that could grow into virtually any market in the country. Mexican food ranks highly among Americans as a favorite and go-to food choice and we all like a little variety, something different, and El Pollo Loco brings that to the table.

"As we enter 2021, our company is well-positioned for the next phase of growth guided by our new three-year Acceleration Agenda. The strategies within our new agenda will focus on an asset light, franchise-driven growth model, continuing to digitize our business to compete more effectively and expanding on what makes us so unique – our L.A. Mex brand identity. We are optimistic about the future of our business and are confident that our go-forward strategies, combined with all we have accomplished to date, will drive sales and profit growth when we return to a more normalized operating environment," says president and CEO Bernard Acoca.

El Pollo Loco Has Mixed Quarter Despite Good Results

There is one thing abundantly evident in El Pollo Loco'sQ4 results, the transformation plan is working and on the right track. The top-line revenue of $110.34 million is flat on a sequential basis but impacted by COVID-related restrictions in the core L.A. market. The revenue is above consensus but by a mere 20 basis points so not really showing much strength, at least not from the macro-perspective.

On a comp-basis, system-wide sales fell -0.2% and were offset by new store openings and strength in the franchisee channels. Company-owned comps which are primarily in the core L.A. region fell by -3.0% while franchisee comps rose by 1.8%. In terms of L.A., comps at L.A. stores fell -2.1% while everywhere else grew 3.3%.

The takeaway here is twofold. On the one hand, the company-owned core business is set to rebound during the spring and summer and will underpin growth. On the other hand, continued expansion into the franchised domain will continue to support and accelerated growth as we go forward. And that will equate into logarithmic earnings growth due to higher-margins associated with the transformation and franchise-oriented business. As for the Q4 period, cash from ops increased more than 50% including the COVID-related expenses and net income from operations grew by a similar amount.

Highly-Valued El Pollo Loco Maybe Not So Expensive

El Pollo Loco is trading at a rather high multiplecompared to its peers. At 25X and 24X its earnings it is trading at a level akin to McDonald's which is a much more stable company and one with a dividend. That said, El Pollo Loco has significant tailwinds driving it along with the prospect of the nationwide economic reopening. In that light, we expect to see the analyst's estimates begin to rise and bring the value down a bit relative to recent price action.

The technical outlook for El Pollo Loco is a little hazy in the near-term but generally bullish for the long-term. In the near-term, the market is struggling with resistance at the 2020 high which is suspiciously close to the IPO opening price and a support level that formed soon after. If the price action can get above $19.55 with conviction we see this stock moving up to $22 and $24 by the summer of 2021.