Portillo: Growth story intact despite commodity inflation (NASDAQ:PTLO)

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Overview

This post serves as an update to my coverage in early October.

I believe Portillo (NASDAQ:PTLO) remains undervalued by 60%. When PTLO shows that it can deliver on its guidance, I think the market will recognize its intrinsic value. Given the Still a relatively small player with plenty of room to grow, it should be able to sustain unit growth of over 10% and same-store sales in the low single digits, as stated. I believe that PTLO will meet its long-term goals and the share price will eventually reflect the value of the company.

performance review

PTLO’s share price is up 10% since my initial post, which I think is a positive indicator that the market has recognized PTLO’s business stability due to its pricing strategy and also its ability to follow growing guided by the administration.

PTLO Stock Price

PTLO Stock Price (Google)

earnings review

The pace of sales supports my bullish thesis

Comparable sales in the third quarter of 5.8% beat the consensus estimate of 2.9% and increased to 10.6% on a 3-year basis. I think if Q4 prices hold at 8% and traffic is down but trending up, SSS could see more gains. I’ve said before that PTLO’s low-price strategy should protect it during a downturn. With this strategy (lower prices than many competitors), PTLO can protect its value proposition and revenue stream from a possible drop in traffic.

Delving into 3Q22 sales which were up 5.8% year-over-year is the result of a 3.3% drop in traffic despite a stable number of tickets served, an 8.2% increase in prices, a 2% decrease in product sales mix, a 2.8% increase in profit from the reclassification of 3P delivery prices previously reflected in the COGS, and a 0% increase in headcount of tickets. (It is important to note that when PTLO makes this change in December, the 3P delivery price realignment benefit will be reduced to 2% in Q4.)

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More importantly, despite the positive results, PTLO is vulnerable to a slow consumer, just like other fast informal chains. However, I still believe that it could benefit from a reduction of the full service, given its low price and the experiential nature of its stores.

Pressure on margins from raw material prices

As commodity inflation remained high and higher utility and maintenance costs impacted the operating expense line, PTLO generated a restaurant-level margin of 22.6%, indicating they are still under pressure. . Commodity inflation reached 15% in 3Q22 and is expected to remain at that level during the next quarter. Internal productivity initiatives implemented earlier in the year appear to be paying off, making labor a bright spot despite a rise in wages early in 3Q22. Based on new information and analysis, I expect food prices to rise in Q4 2022 as commodity inflation remains high and PTLO catches up with price accounting change delivery in December.

Although no formal guidance has been provided for FY23, I anticipate inflation will moderate from current levels, likely into the mid to high single digits. Management has targeted the higher end of its 13-15% commodity inflation guidance for FY22.

Unit Growth Outlook

At the moment, PTLO’s target of 7 restaurant openings in FY22 remains intact, with the 5 scheduled for Q4 close to opening, but management has acknowledged that a store may collapse early in FY23 due to ongoing delays. in the permits. With most of these stores opening at the end of the quarter, I expect the Q4 revenue impact of the new units to be adequate but not spectacular. Next year, the company plans to open nine stores, most of which will be loaded with 2H. The importance of these openings is related to a key long-term debate, brand portability, and the performance of stores in new markets will provide insight into this.

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Model update

There is no particular change in my model. I continue to believe in PLTO’s long-term history and management’s ability to achieve their revenue goals from high single digits to low double digits.

Long-term revenue growth is based on the lower end of management’s forecast: 10% unit growth and 2.5% same-store sales growth. Margins may improve due to fixed cost leverage, but I conservatively forecast they will remain flat in FY22.

The same intention remains, I want to show the readers that even in the lower range of the guide, PTLO is still an attractive investment opportunity that could generate good returns.

After the earnings, PTLO is still trading at 24x forward EBITDA. Based on the above assumptions and a 24x NTM EBITDA, I believe PTLO is worth a market cap of $2.5bn in FY26, which is 60% above its current level.

Valuation

Author’s Estimates

red flags

Change in consumer preferences

It’s hard to predict, but if people’s tastes in fast food were to change, PTLO would suffer. Plant-based meat alternatives are widely consumed as an illustration of this trend.

Leveraged Balance

PTLO has a higher amount of debt (Net Debt/EBITDA) than other rapidly expanding restaurants. This isn’t necessarily a bad thing, but it could force PTLO to issue shares during a prolonged economic downturn so they can keep the lights on.

conclusion

Despite a 10% share price increase since my hedge, I believe PTLO remains undervalued at its current price. It is still true that PTLO is a small fish in the industry and has a lot of room to expand. In addition, it has a highly appreciated brand among customers, which is crucial in the highly competitive food industry, where brand recognition is a great differentiator.

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