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What Awaits El Pollo Loco Holdings (LOCO) in Q1 Earnings?

El Pollo Loco Holdings, Inc. LOCO is set to report first-quarter 2016 results on May 5, after the market closes. Last quarter, the company posted a positive earnings surprise of 15.38%.

The company has a trailing four-quarter average positive surprise of 10.24%.

Let's see what is in store for this quarter.

Factors to Consider

El Pollo Loco has posted positive comps for 18 consecutive quarters. This fire-roasted chicken specialist’s fresh handcrafted Mexican inspired cuisine made it popular and ensured a steady rise in traffic. Menu innovation and limited time offers also contributed to traffic growth. We expect the trend to continue in the to-be-reported quarter.

Rising health concerns and increasing awareness about obesity and related diseases led to a shift in consumer preference toward healthy products. Apart from its signature fire grilled chicken, El Pollo Loco creates unique items that contain less than 500 calories for health-conscious customers and other customized meals without compromising on flavors. Given the company’s focus and efforts to boost traffic, comps are expected to remain positive in the first quarter.

However, increasing labor costs as a result of higher minimum wages in California – where the company has substantial presence – would keep profits under pressure.

Earnings Whispers

Our proven model does not conclusively show that El Pollo Loco is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 18 cents.

Zacks Rank: El Pollo Loco’s Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Dave & Buster's Entertainment, Inc. PLAY, with an Earnings ESP of +1.69% and a Zacks Rank #1.

The Wendy's Company WEN, with an Earnings ESP of +16.67% and a Zacks Rank #1.

Red Robin Gourmet Burgers Inc. RRGB, with an Earnings ESP of +0.91% and a Zacks Rank #3.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
 
WENDYS CO/THE (WEN): Free Stock Analysis Report
 
DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report
 
EL POLLO LOCO (LOCO): Free Stock Analysis Report
 
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