Battle Of The Mexican Chains: Del Taco Or El Pollo Loco?

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Includes: LOCO, TACO
by: The Specialist

Summary

TACO and LOCO are both primarily Mexican chains in California.

Both describe themselves as QSR+.

Both trade at similar valuations but one has a clear edge.

There is some interesting reading at the bottom of this filing from Levy Acquisition Corp. (NASDAQ:TACO) soon to be renamed Del Taco. TACO used to be known as basically just another Taco Bell but lately it has evolved into what into what it calls QSR+ which it claims is halfway between fast-casual and QSR and shares that space with El Pollo Loco (NASDAQ:LOCO).

In other words, QSR+ is basically made fresh to order with a drive-thru. Both chains have a Mexican-American theme and are primarily in California so they make for fun comparisons. As a consumer, I happen to like both of what each offers and think they both have a justifiable future to expand. However my opinion and what I have to say about the food doesn't amount to a hill of refried beans compared to what the numbers generated by the masses have to say.

Both average unit sales seem to be growing at a similar pace. Last quarter TACO grew same-store sales by 7.7% while it was only 5.1% for LOCO, but considering that the average LOCO does something in the neighborhood of 20% more sales to begin with the raw sales growth number was similar.

Next you have unit growth opportunity. Both have plans that can expand or contract over time but the key is both have vast stretches of the nation that are untapped. But the question is: How portable is either concept?

LOCO has just barely begun expansion to other states most notably in Texas and seems to be seeing good success. TACO however has dabbled in 14 other states outside of California with over 100 locations and has arguably already at least somewhat proven the portability of the concept.

In both cases the chains are early in their hopeful growth plans so any valuation is based on a lot of speculation but both are profitable here and now to create some sort of price tag. Based on analyst estimates for 2016 and the stock prices as of this writing, TACO trades with a P/E of 29 with 34% expected EPS growth, and LOCO trades with a P/E of 26 based on 16% expected EPS growth.

Based on the basic numbers, I put the favor to TACO. The P/E is a little higher but you get faster expected growth, similar unit growth opportunity, but less risk in terms of portability question geographically. What works in California and even Texas doesn't always work everywhere else and TACO has already given evidence it has without "charging" much more for this less risk in terms of stock price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.