What a brutal six months it’s been for Portillo's. The stock has dropped 46.4% and now trades at $8.08, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Portillo's, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Portillo's Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Portillo's. Here are three reasons why there are better opportunities than PTLO and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.
Portillo’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.1% per year.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Portillo's broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Portillo's burned through $2.26 million of cash over the last year, and its $630.2 million of debt exceeds the $16.62 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Portillo’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Portillo's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Portillo’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 20.3× forward P/E (or $8.08 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
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