Over the past six months, Portillo’s shares (currently trading at $4.68) have posted a disappointing 14.2% loss, well below the S&P 500’s 9.4% gain. This might have investors contemplating their next move.
Is now the time to buy Portillo's, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Portillo's Will Underperform?
Even with the cheaper entry price, we’re swiping left on Portillo's for now. Here are three reasons why PTLO doesn’t excite us, 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
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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
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 $688.6 million of debt exceeds the $23.99 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $94.57 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. Following the recent decline, the stock trades at 19.8× forward P/E (or $4.68 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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