Jefferies Says El Pollo LoCo On Track For Positive Comps In Q3

Jefferies maintained its Buy rating on El Pollo LoCo Holdings Inc LOCO as it believes the restaurant operator is on track for positive Q3 same-store sales and traffic.

El Pollo Loco is a growing "QSR Plus" restaurant company that specializes in fire-grilling citrus-marinated chicken in front of its customers. El Pollo Loco has now grown to more than 400 company-owned and franchised restaurants across California, Arizona, Nevada, Texas and Utah.

"We continue to find this California-centric QSR+ brand well-positioned to grow sss and units in a challenging overall industry environment," analyst Andy Barish wrote in a note.

Barish said the same store sales would be driven by operational improvements, brand positioning and a healthy CA restaurant sales environment.

The analyst, who has a $16 price target on the stock, believes the below par new store productivity (11 units in Houston) is not a major long-term drag on results.

"It will cause some longer new unit inefficiencies (labor) and roughly a 50 bps drag on overall margins in '16, but should get better over time," Barish continued.

Meanwhile, LOCO is seeing 4 percent deflation in overall basket due to declines in chicken prices this year. The analyst noted that the early chicken contract negotiations are beginning and management is cautiously optimistic that commodities can be flattish in '17.

"At 18x P/E and 9x EV/EBITDA on our below consensus estimates (~17x/8.5x on Street estimates), we believe LOCO stock is attractive for small cap "core" investors," Barish added.