Is Portillo’s Stock a Buy?

Portillo’s (NASDAQ: PTLO), is a Chicago based restaurant chain, founded in 1963, that focuses on nostalgia, affordability, and authentic menus. In 2021 the company went public with Berkshire private equity, an early funder, maintaining majority ownership.

Now with 86 locations across 10 states, Portillo’s performance has been positive and attracting attention. PTLO’s market capitalization has been on a steadily upward trajectory and now sits just shy of $1 billion.

The positive momentum has largely been a function of improving fundamentals. The 2023 earnings call catalyzed the share price to spike to almost $16. Fourth quarter sales increased by 24.5% to approximately $188 million and fiscal year sales totaled $680 million with an adjusted EBITDA rate of 24.7%.

Yet in spite of all the positive trends, the share price is down by almost 50% from its 52 week high of $23.99, so is this the time to buy or not?

Will Portillo Stock Recover?

Restaurants have always been a notoriously thin margin business. Food and labor costs coupled with inflation continue to impact the industry and Portillo’s is not immune.

The company managed to offset some of these costs, but hourly labor rates still increased by 2.4% in 2023.

Cash flows have increased, but the balance sheet is still burdened with $550.41 million in debt, a figure that grew by 5.12% in 2023 and will likely escalate with higher interest and operating expenses.

Their aggressive ramp of new locations is accompanied by the downside of rising capital expenditures as each new restaurant further weighs on the balance sheet. Pre-opening expenses increased by $1 million to 2.1% in the fourth quarter of 2023.  They are estimated to be between $8-$9 million in 2024.

The return on investment for new locations is also not immediate as it takes time to build a steady and predictable revenue stream, which management acknowledges impacts year one margins in particular.

The industry challenges and strategic risks are valid, but there is still some solid upside potential.

Where’s The Potential For Growth?

The company’s top brass remains focused on expansion and have a target to open 920 more locations over the next two decades, including 9 new restaurants in 2024. If everything goes to plan, management forecasts growth of 12-15% year-over-year looking forward.

These efforts are rooted in lucrative markets with large populations. Texas was a major focal point and success in 2023 while major metros such as Los Angeles and Phoenix have also been target geographic hubs.

Most new restaurants include smaller footprints, efficiently designed kitchens, and use of automation. This is their “restaurant of the future” concept focused on operational efficiencies. Drive through only locations are also a priority given the cost savings opportunities.

Menu innovations are another growth driver as consumer demands for healthier options are met. For example, salads generated $650,000 in revenue per year. Two new permanent salads have been added to the restaurant’s menu item list.

Like other fast food chains, Portillo’s takes menu additions seriously and any new product is vetted for efficiency with kitchen set up and product mix.

Catering only made up 5% of revenue in 2023, but it could be another growth opportunity. Some analysts estimate the catering industry will exceed $100 billion by 2030, and margins are likely to improve in tandem not least because of decreased labor costs as automation improves.

PTLO’s management team has outlined clear priorities for growing its business and earnings should follow given the positive unit economics from each store that have already been established.

Is Portillo’s Stock a Buy?

Analysts seem optimistic on PTLO with 9 rating it as a Strong Buy. The consensus estimate is for the share price to reach a high of $27 per share.

An April 1st forecast from an William Blair analyst raised the estimate of EPS to $0.50 for 2024, which should bode well for the firm’s prospects given the steady growth forecasted too. The current consensus seems positive but contingent upon continued growth and improvements. 

PTLO is also favored among institutional investors who make up almost 80% of stock owners. Berkshire Partners, the early financier, maintains a holding of 5.92 million shares. 

The Bottom Line

While the upside to analysts fair value price of $21 per share is a substantial 48% from present levels, sentiment has been dimming on the stock with two analysts revising their forecasts lower for the upcoming quarter.

That’s not entirely a surprise given that the stock is trading at a high earnings multiple at this time of 39.7x. Further evidence of valuation concerns stem from the PEG ratio hitting a lofty 1.45x.

It’s noteworthy also that while analysts remain optimistic in their forecasts, a discounted cash flow forecast analysis pegs fair value closer to $16 per share, which would represents about 22% upside.

Regardless of which target is focused on, the reality is the company must continue growing in order to reward shareholders because no dividend are paid at this time, nor are any expected in the near future.

The share price has had a history of volatility too, so it’s not a stock for the faint of heart but for those who see material upside as analysts do, the potential for gains may well be considerable at this time. Solid execution from management now is needed to reward shareholders over the coming years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.