Over the past six months, Portillo’s shares (currently trading at $4.40) have posted a disappointing 15.9% loss, well below the S&P 500’s 11.8% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Portillo's, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Portillo's Will Underperform?
Even with the cheaper entry price, we’re passing on Portillo's for now. Here are three reasons you should be careful with PTLO, plus one stock we’d rather own.
1. Flat Same-Store Sales Indicate Weak Demand
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 barely increased over the last two years as its same-store sales were flat.
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 $691.4 million of debt exceeds the $21.25 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $94.33 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
We cheer for all companies serving everyday consumers, but in the case of Portillo's, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 21.7× forward P/E (or $4.40 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
Stocks We Would Buy Instead of Portillo's
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