Portillo’s: Long trail of growth in a large TAM (NASDAQ: PTLO)


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Insight

of Portillo (NASDAQ: PTLO) is currently undervalued by around 70%. I think the market will realize the intrinsic value of PTLO when it shows that it can achieve its goals and the high level of leverage will not be a publish. It should be able to continue to grow double-digit units and same-store sales in the lower single digits, as noted, given that it is still a relatively small player with lots of room for growth. I believe PTLO can achieve its long-term goals and the stock price should reflect business value over time.

activity Descrition

PTLO is a fast food restaurant serving traditional Chicago street food. Chicago-style hot dogs and sausages, Italian beef sandwiches, hashed salads, burgers, crinkle-cut fries, homemade chocolate cake, and milkshakes are among the items on the menu. PTLO owned and operated 71 Portillo’s restaurants in nine states of the United States as of June 26, 2022.

Long streak of growth

PTLO had 71 units open at the end of 2Q22 and plans to have 76 locations by FY22. Since PTLO is still a small concept in its early stages of growth, I think it will easily achieve this goal. In the United States, there are approximately 197,000 fast food restaurants, making PTLOs less than 1% of the industry. PTLO’s long-term goal is to achieve double-digit annual unit growth and low-single-digit same-store sales, which would translate into high single-digit and double-digit revenue growth. For starters, I’m confident that PTLO can continue to grow at the expected rate if executed well (as it has for the past eight years), as there are successful examples such as Wingstop (WING) and Chipotle (CMG). From TAM’s perspective, even if PTLO grows at an annual rate of 15% over the next ten years, it still only accounts for one-fifth and one-tenth of WING and CMG FY21 stores, respectively. The number of states in which PTLO currently operates is another qualitative indicator that it has plenty of room to grow. The United States is a big country and opportunities to expand to other states could be a lever for future growth. The thing is, there’s plenty of room for expansion.

TAM

Author’s estimates, WING documents, CMG documents

TAM

Author’s estimates

TAM

PTLO Investor Day 2022

Omnichannel sales channel

PTLO restaurants are built on the principle that customers value speed, ease of use, efficiency, and the ability to make purchases through a number of different methods. For this reason, its restaurants offer drive-thru, indoor seating, curbside pickup, takeout, delivery, and even offsite catering. Drive-through and delivery sales increased during COVID, demonstrating the success of PTLO’s strategy to quickly adapt to sales changes and train staff for possible pandemic lockdown periods. Additionally, PTLO restaurants are strategically placed to take advantage of the drive-thru culture in the United States. Almost all PTLO restaurants are designed to accommodate large crowds, with features like dual-lane drive-thru and ample parking. I think PTLO has a good chance of maintaining its success and even increasing its market share because it has a lot of experience across multiple channels at a time when customers value ease of use and a wide range of ways to interact.

digital sales

PTLO Investor Day 2022

strong brand

PTLO has an intangible competitive advantage that doesn’t show up in the financial statements – the brand, which some investors may overlook. After nearly 60 years in business, PTLO has built a solid reputation with its loyal clientele. The menu is diverse and can cater to a wide range of tastes, which helps its restaurants succeed in many different business areas. As difficult as it can be to accurately quantify brand success, there are still metrics we can use. For starters, PTLO is backed by an active and enthusiastic online community. Socialinsider’s 2022 Industry Benchmark Study found that PTLO’s Facebook posts have on average 26x more engagement than the average industry brand post, and PTLO’s Twitter posts (TWTR ) have on average 46 times more engagement. Dynata conducted a nationwide survey in July 2021, and the results showed that PTLO had a higher net promoter score than a number of well-known fast food chains (PTLO S-1 Socialinsider and Dynata data source) .

NPS Rating

PTLO Investor Day 2022

Value meal insulates recessionary pressures

One of PTLO’s main selling points is the value it brings to its customers. The PTLO strategy prioritizes speed, multi-channel accessibility, and delivering high-quality, irresistible food at low prices. It is PTLO’s policy not to offer sales or promotions on their products. Rather, its goal is to consistently impress its customers with a high level of service at a fair price. As someone who loves fast food, I believe PTLO will be able to maintain and even grow in volume during economic downturns due to its combination of mouth-watering foods (especially fast food) prepared with ingredients high quality and served quickly at an affordable price per person. spend about $9.75.

Provide

Based on my investment thesis, I expect PTLO to continue to grow its store unit count to capture a bigger slice of the pie. Management is moving towards a long-term revenue growth target of high single digits, which I believe is achievable given that it is still a small player today today. That said, my guidance is based on consensus numbers for FY22 and growth going forward at the lower end of the guidance, unit growth of 10% and same-store sales growth of 2.5% . Margins may improve due to the leverage of fixed costs, but I cautiously expect them to remain flat from FY22. What I want to show readers here is that even in At the lower range, the PTLO remains an attractive investment opportunity that could generate good returns. PTLO’s valuation was downgraded slightly from 29x forward EBITIDA to 24x forward EBITDA, which remains roughly within the range of competitors such as WING and CMG. Based on the above assumptions and an NTM EBITDA of 24x, I found an intrinsic value of $35.39. That’s about 70% higher than the current stock price of $20.94.

Evaluation

Author’s estimates

red flags

Recession

Since dining out is considered a luxury for some, the PTLO could be negatively affected by changes in the U.S. economy, such as lower personal disposable income or slower job growth, or by changes in the restaurant industry that reduce store profits. high level, such as higher labor costs, higher food prices or higher rent.

Changing consumer preferences

It’s hard to predict, but PTLO would suffer if people’s fast food tastes changed. In this regard, the popularity of plant-based meat substitutes is a good example.

Leveraged balance sheet

Compared to other fast-growing restaurants, PTLO has a higher level of leverage (net debt/EBITDA). That’s not necessarily bad, but it could cause PTLO to issue stock to keep the lights on during a prolonged economic downturn.

Conclusion

PTLO is undervalued at its current price as of the date of writing, in my opinion. PTLO is still a relatively small player in the industry, and as such it still has a long way to go to continue growing. More importantly, it has a brand that consumers love, which is very important in the food business because brand awareness is one of the key factors that sets players apart. While there may be some near-term headwinds in terms of commodity prices, I believe this will all eventually normalize over time, and PTLO will be an attractive investment opportunity in hindsight.

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