Stifel Downgrades Pollo Loco Based On Weak Comps Forecast

The US economy is likely to slide into recession within the next three to nine months, Stifel’s Paul Westra said in a report. He changed his view on the monolithic Restaurant Group to “Bearish” from “Bullish,” and downgraded the rating on El Pollo LoCo Holdings Inc (NASDAQ: LOCO) from Buy to Hold.

Analyst Paul Westra mentioned that restaurant stocks were “monolithic,” since about 75 percent of the stocks tend to outperform or underperform together throughout a business cycle.

Reasons For Turning Bearish

Westra mentioned three reasons:

1. In 2Q16, there was a simultaneous comp deceleration across every industry sector, pointing towards a prolonged dining-out slowdown.
2. Historically, Restaurants have suffered more than two years of margin-contracting Relative Pricing Power at the beginning of dining-out declines, “as discounting quickly ratchets-up in the face of declining sales.”
3. In the year preceding the last three US recessions, on average Restaurant stocks have lost 23 percent, versus 10 percent in the S&P 500.

Call On LOCO

“We have grown extremely cautious on the restaurant industry as a whole, and today we downgrade LOCO from Buy to Hold mainly to reflect our bearish Macro Sentiment (w/ 1Q16/2Q16 industry comps of just +1.5%/+0.7% (or below key +2% threshold)); and (2) limited earnings/comp upside opportunity ahead of likely US recession,” the analyst wrote.

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