This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Portillo’s
Have you ever loved someone so much that you were willing to, at the drop of a hat, drive three and a half hours (or a little more than 200 miles) just to get to them?
If you have, we consider you to be a hopeless romantic, because our team at MacroHint, according to our previous actions, is only willing to do that for food.
In fact, we drove to the restaurant chain in question, waited in line for hours (yes, it’s that busy sometimes), drove to a hotel in the area (why not make a mini-vacation out of it?), took our bags of food upstairs after checking in (“no ma’am, this isn’t our luggage, this is just our food”), placed a few stiff hotel bathroom towels on the bed and subsequently went to work on some hot dogs, fries, burgers (you also can’t forget the cheese sauce) and Coca-Colas so big you could practically swim in them.
Unfortunately, we’re not joking.
From shamelessly departing Austin, Texas, maneuvering through Temple, Texas, trudging through Waco, Texas (but us Longhorns don’t like the Baylor Bears so who really cares), we subsequently somehow (the Lord only knows) got through the mess that quite literally is Dallas traffic into a little area known as The Colony, Texas.
There lies a box-like building with a look of vague comfort and familiarity, drastically long drive-thru lines (yes, multiple lanes), emboldened red lettering on the storefront with some of (if not the) the best fries, hot dogs, charred to perfection cheeseburgers to-die-for chocolate cake shakes.
Portillo’s flat-out does food right.
Ok? Ok.
From the original “Dog House” to an emerging, growing national chain with the original Portillo’s opened up in Villa Park, Illinois to having locations in Arizona, California, Florida, Illinois and various other states, the growth isn’t necessarily going to slow anytime soon given the company’s ambitious yet seemingly viable gradual expansion plan.
Portillo’s is already a wiener (they have those too, but we meant winner) in the “savory taste” and “craveable to the point of willfully wasting gasoline” categories, however, let’s see if it is a winner in the stock analysis category.
Is this company’s stock (NASDAQ: PTLO) worth considering investing in now and holding onto for later?
Let’s find out.
Portillo’s’ stock financials
In kicking things off, Portillo’s has a market capitalization of $1.54 billion, a share price hovering just over $21, no annually distributed dividend to its shareholders and a price-to-earnings (P/E) ratio of 89.98, which may or may not indicate that this company’s stock is worth paying for at this current juncture.
More specifically, it is generally accepted that a price-to-earnings ratio of 20 hints that a stock is trading at exactly fair value (or its intrinsic value) and it follows that anything higher implies that it is overvalued and if you opt to follow that chain of logic, it can be said that Portillo’s’ stock is overvalued at the moment.
However, like with most things, there are exceptions and one of the exceptions to Portillo’s stock (NASDAQ: PTLO) having an elevated price-to-earnings ratio would be a considerable amount of growth and given the aforementioned linked expansion plan, this company’s stock just might be worth paying a premium for.
Nevertheless, in order to get a better idea as to whether or not this happens to be the case for this company, let’s get a bit more familiar with this company and its core financials.
According to the company’s balance sheet, Portillo’s’ executive team is in charge of tending to $1.28 billion in terms of total assets along with just north of $1 billion in terms of total liabilities.
To keep things relatively short and sweet without watering anything down, this is essentially the sort of condition we expected Portillo’s’ balance sheet to be in, given that it operates in the long-term, cost-heavy restaurant sector, accounting for its total assets and total liabilities being close to one another.
Nevertheless, we’re happy to find that its total assets outweigh the amount of its total liabilities to begin with.
Moving onto the company’s income statement, annual revenue growth since 2019 has been trending upward for the most part, standing at $479 million in 2019, enduring a small dip the following year, reporting $455 million, $535 million in 2021, to its latest displayed figure (on TD Ameritrade’s platform) of $587 million in 2022.
It’s no secret that this company and the dining sector as a whole have their fair share of economic sensitivities during times of widespread consumer distress, however, we expect this company’s total annual revenues to continue climbing at a gradual rate over the next handful of years given its national expansion plan and the success that will more than likely follow given the quality and proper pricing of its food.
However, even though we are a little biased and Portillo’s fans for life, it wouldn’t be very objective of us if we didn’t mention that as the current recession deepens and interest rates remain at elevated levels (and sticky), there are some broad economic headwinds facing Portillo’s and restaurants and frankly businesses alike that investors must absolutely consider.
As it relates to the state of the company’s cash flow statement, Portillo’s’ total cash from operations (also since 2019) has been both consistent and positive throughout the years, which, given the recent and current economic landscape, is absolutely saying something.
Additionally, Portillo’s’ net income was positive for each year (over the same time period) excluding 2021, which, we don’t necessarily given the company a pass on, but we firmly and fairly acknowledge the difficulty of running a restaurant chain during what has hopefully been the worst of COVID-19, as hardly any restaurant or chain (if any) was or is completely immune to shutdowns invoked by the Pandemic.
Portillo’s’ stock fundamentals
When it comes to this company’s trailing twelve month (TTM) net profit margin, we’re slightly bummed.
It appears as though being intent on producing great quality food(s) while trying to keep prices low and attractive to the masses has a cost of a relatively muted TTM net profit margin, at least, in comparison to the industry’s average.
Or at least this is part of the equation.
For instance, according to TD Ameritrade’s platform, the company’s TTM net profit margin is tucked away at 2.52% to the industry’s average of 10.66%.
While, of course, as consumers (literally) we don’t have any qualms with this quality and cost breakdown, as investors we do hope that Portillo’s is actively seeking ways in which it can pump up its TTM net profit margin overall, perhaps by offering more high-margin items to its menus.
Also, one should keep in mind that this company is still in the process of growing its footprint across the United States so it may take a little time for its TTM net profit margin to beef up.
Portillo’s has beef too, by the way.
Regardless of reason, we hope to see meaningful growth in the company’s TTM net profit margin in the intermediate-term.
Regarding the company’s TTM returns on both its assets and investments, like its TTM net profit margin at first glance, they aren’t all that impressive nor competitive at the time of this writing.
For example, also according to TD Ameritrade’s platform, Portillo’s’ TTM returns on assets and investments stand at 1.34% and 1.73% (respectively) to the industry’s respective averages of 8.47% and 11.88%.
We view these core metrics similarly as we do its TTM net profit margin.
There needs to be some meaningful improvement between now and the next few years, however, we understand that its TTM returns on assets and investments are partially muted due to the company’s current growth.
There’s always something to consider and options to weigh.
Should you buy Portillo’s stock?
Sure, we would’ve loved to have said that this company and its stock (NASDAQ: PTLO) is a screaming “buy”, but given the current state of the macroeconomy, its TTM net profit margin and returns on assets and investments along with its fair balance sheet and outsized price-to-earnings ratio (although the company is indeed growing, it isn’t growing fast enough to warrant a P/E ratio as high as it is today, from our vantage point), we certainly recommend checking out one of the company’s locations and getting a bite to eat, however, in terms of our appetite for its stock (NASDAQ: PTLO), like its present price-to-earnings ratio, we’re a bit full at the moment.
Nevertheless, incorporating this company’s tangible growth prospects and progress thus far, we feel comfortable in giving the company’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.