Portillo's has been treading water for the past six months, recording a small loss of 1% while holding steady at $11.96.
Is now the time to buy Portillo's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Portillo's Not Exciting?
We're cautious about Portillo's. Here are three reasons why PTLO doesn't excite us and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
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 1.7% 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. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Portillo’s $611.6 million of debt exceeds the $12.94 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $104.2 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Portillo's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Portillo's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Portillo's isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 33.3× forward P/E (or $11.96 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the most dominant software business in the world.
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