SunTrust Confident In El Pollo Loco's Unit Growth Story; Starts At Buy

• Shares of El Pollo LoCo Holdings, Inc LOCO have increased 10.6 percent over the last five trading days to reach a high of $11.40 on October 7.
• Jake Bartlett of SunTrust Robinson Humphrey has initiated coverage of El Pollo LoCo with a Buy rating and price target og $17.
• Barlett sees the company’s unit growth story as robust, supported by its “unique” positioning of healthy and higher quality food. However, the stock is currently not pricing in any growth beyond 2015.

Analyst Jake Bartlett expects El Pollo LoCo to see an acceleration in same store sales to 3 percent in 4Q15 and 3.4 percent in 2016. Although labor issues are expected to put pressure on the 2016 and 2017 margins, Bartlett believes that lower commodity inflation in 2016 would mostly mitigate the impact.

Barlett also believes that the stock could see upside, “once investors regain confidence in LOCO’s SSS trajectory and the unit growth story.”

Bartlett expressed confidence in the company’s unit growth, due to “its unique brand positioning, no direct national competitors, strong new unit returns, disciplined growth strategy, and participation by franchisees, which are putting cash to work in new markets alongside LOCO.”

The management has attributed the delay in openings in 2015 to permit backlog, while Bartlett believes that the same store sales misses in 1H15 were “promotionally driven and fixable.”

The factors that led to the company outperforming its peers for 14 straight quarters were still in place and the California economy continues to be strong. Bartlett expects traffic to increase in 4Q15 and 2016.