2 'New Age' Restaurant Stocks Stifel Analysts Are Buying

One of the fastest growing trends within the restaurant sector is the emergence of "casual fast food" chains. The problem for investors is that there are many options to chose from.

Paul Westra of Stifel offered investors two names to consider investing in: El Pollo LoCo Holdings Inc LOCO and Habit Restaurants Inc HABT.

El Pollo LoCo: Stock Price Underestimates Growth

According to Westra, El Pollo Loco has established a "unique white space" within the sector by offering fast-casual-or-better quality food, but at a speed of service near QSR (quick service restaurants). In fact, the company's fire-grilled chicken entrée is around 25 percent cheaper than a typical fast-casual competitor while its speed of service of four minutes is more than half of the nine minutes for its peers.

Westra detailed his valuation model and noted: 1) the company's current business (460 stores) is valued at $12 per share, 2) franchisee-store only "growth option" is valued at $5 per share (assuming 600 future franchise stores over 20 years), 3) company-store growth option valued between $0 to $10 per share (based on 7-14 percent future returns on equity in new markets).

Bottom line, over the course of four years, El Pollo Loco's management team managed to turn prior-year comps running negative and achieve a four-year annual adjusted EBITDA growth of more than 11 percent per year. As such, the company is in good hands with an "operations-focused" management team.

Shares were upgraded to Buy from Hold with a newly established $17 price target.

Habit Restaurants: Above Peer Metrics Trading At A Discount

Westra argued that Habit's positioning is representative of an "up-and-coming second wave" of quick-casual restaurants will likely "dominate" the landscape over the next 30 years. The company operates a fast-casual "Better Burger" concept that offers char-grilled burgers and sandwiches.

The analyst added that in today's "socially networked world," it is more important "how a company operates" than "what it produces." In fact, Habit is a "poster-child representative" of the new realities.

On the valuation front, the analyst's discounted cash flow valuation valued the company's existing units at $10 per share and future unites (1,800 units assumed) at $25 per share. On a valuation basis, the stock's current price fails to reflect its above-peer unit-growth potential and "significantly" above-peer store-level return on invested capital.

Finally, Habit also has a structural advantage in which it satisfies the "big-three outputs" which include high sales mix percentages of dinner, dine-in, and female/family guests.

Shares were upgraded to Buy from Hold with a newly established $35 price target.