Is Restaurant Portillo’s recent IPO worth watching in 2022?

Portillo Restaurant Group (NASDAQ: PTLO), a newcomer to the restaurant business after its IPO on October 21, has seen dramatic ups and downs since its debut on the stock exchange. The company, whose menu focuses on Chicago-style hot dogs, Italian beef sandwiches, grilled burgers and fresh salads, saw its stock price jump nearly 6% just before Christmas and around 20% during Christmas week.

The stock market is currently bullish on the restaurant chain, although it faces inflation issues like the rest of the industry, as well as labor shortages, supply chain issues. supply and persistent disruption of COVID-19. Many indicators look bullish, but you may want to choose your entry point carefully. Here are three important factors to consider.

A Portillo in Naperville, Illinois. Image source: Portillo’s.

1. The market is positive, but not only for Portillo

Portillo’s gained nearly 6% in trade on Dec. 23, after a Securities and Exchange Commission filing detailed the addition of an eighth member to the previously seven-member board. New recruit Paulette Dodson is described as a “seasoned legal executive” as well as “a strategic leader and a talented legal mind who brings a wealth of knowledge” with 30 years of experience advising a range of different CEOs companies and private organizations. . The company says it expects it to provide “strategic direction” for future growth.

Although on the surface, Dodson’s appointment appears to have boosted Portillo’s shares, many restaurant companies rose sharply on December 23. The gains included a 7.6% increase for Dutch brothers, a coffee chain experiencing exceptional demand; a jump of more than 5% for the salad restaurant Soft green despite his difficulties with spending; and smaller gains for established businesses like the recently revived parent company of Burger King and Tim Hortons, International restaurant brands.

Portillo’s increase matches the robust jump shown by other restaurant IPOs like Dutch Bros. These gains appear to be driven by analysts’ confidence that the omicron variant of COVID-19 is not expected to significantly affect restaurant sales. Peter Saleh, restaurant analyst at financial services firm BTIG, told Yahoo! Finance that the labor shortage was more important to restaurant fortunes right now than the pandemic. This shows that external factors are just as important to Portillo’s market success as any internal strategy, and that they are unlikely to significantly reverse industry trends.

2. The company’s financial statements are mixed

Portillo’s key metrics are strongly positive, with revenue up 15.3% year-over-year to $ 138 million. A 6.8% increase in sales at the same restaurants and five new restaurant openings contributed to the increase. Focusing on revenue details during the third quarter earnings call, CFO Michelle Hook said the same restaurant’s sales were “mostly driven by a 7.9% increase in the average check, partially offset by a decrease in our traffic “. Larger individual purchases result as customers buy more items and more expensive items, along with price increases.

Ultimately, however, net income fell 19.4% to $ 6.5 million. Rising costs for labor and raw materials, especially more expensive beef, took a toll on Portillo’s profits in the quarter. In short, the channel is grappling with the effects of rampant inflation in the US economy. But while that inflation is currently at its highest level in 40 years at 6.9%, analysts expect it to decline to 2% or 3% in 2022.

Another important financial fact about Portillo is that only around 28% of its shares were sold to new investors during the IPO. Much of the rest is in the hands of Berkshire Partners, a private equity firm that bought Portillo in 2014. If Berkshire decides to sell its shares, it will flood the market and almost certainly cause the stock to fall much lower.

3. Portillo’s is growing, with the Sunbelt in its sights

Although Portillo only had 69 locations at the time of its third quarter earnings report, it has pretty aggressive expansion plans. It plans to open seven more restaurants in 2022, an increase of about 10%, while continuing its current program of delivering food to all 50 states.

During the results call, CEO Michael Osanloo said the company believes that in the long term there is potential for more than 600 Portillo restaurants across the country. The chain plans to continue expanding its presence in the Midwest, its current center of operations. As a second strategic initiative, however, it is also targeting the Sunbelt states for further openings, with Arizona, Florida and Texas earmarked for development. While the expansion is relatively small at this point, it should allow Portillo – and investors – to gauge demand for the restaurant chain’s food outside of its current Midwestern territory.

Finally, Portillo’s is launching an experimental restaurant in Illinois with no catering options. It will have “three service lanes as well as a pickup, catering and delivery area,” according to Osanloo. With delivery and pick-up being much more popular since the onset of the pandemic, the new restaurant setup could allow Portillo’s to increase its footprint without having to incur all the expense of maintaining a food court in the areas. with low pedestrian traffic but with good ordering potential.

What is a good entry point for the Portillo stock?

While Portillo’s has seen its revenues plummet under pressure from input inflation, COVID-19 and the current labor shortage, these challenges will likely be temporary. The pressures will likely ease in the course of 2022, when Portillo’s robust income growth and expansion plans should give it bullish momentum as a good choice among restoration stocks.

In the meantime, however, it looks like Portillo’s will experience sharp swings in the value of its shares for some time, as often happens following an IPO. The biggest wildcard, however, could be Berkshire Partners’ primary stake in the company. Waiting a few more months to see if Berkshire sells after the foreclosure expires, then waiting for stock prices to drop below the new average range, might be the best strategy to get into this new public company before the late 2022 rebound. or 2023 as inflation declines.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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