IPO Review – Portillo’s (PTLO) -10/21 Debut

Company Profile

If you are from the Midwest or specifically the Chicagoland area, you know  Portillo’s. I even made a tik tok when I found out they were going to IPO back in august. At the time though I didn’t have the exact date of the IPO or the details of their financials.

The only thing I knew is that there is usually a long wait time during lunch and dinner at most of their locations. For those of you that aren’t familiar with Portillo’s, it started off as a hot dog stand but along with Chicago style hot dogs it serves Italian beef, burgers, fries, shakes. 

It’s not the healthiest of places to go, but they do have some salad options as well 🙂

So I’m slightly biased based on the brand and where I’m from (Chicago), but I promise to try to analyze this from a financial point of view without bias.

What I thought was interesting is that they actually talk about the brand awareness having an impact on expanding in states outside of Chicagoland and how those locations take a little bit more time to accelerate in revenue growth based on the time needed for the brand to be recognized and absorbed by the new community.

S-1 Filing Highlights

Here are some quick overview numbers of the IPO (source: streetinsider.com)

Date: 10/21

Pricing: $17-$20

Shares Offered: 20,270,270 of its common stock of 71,480,492 shares outstanding

Valuation: Between $1.21 billion and $1.43 billion.

Proceeds: Looking to raise around $375 million.

Ownership: Was acquired by Berkshire Partners in 2014 for $1 billion.

If you want to check out the full S-1 Filing yourself.

Current Restaurants Overview

As of June 2021, the company has 67 operational restaurants across nine states in the US.

Each Portillo’s location on average served approximately 800,000 guests in 2020 and approximately 825,000 guests in the twelve months ended June 27, 2021, based on our average per-guest spend of approximately $9.60 and our AUVs (Average Unit Volume) of approximately $7.7 million in 2020 and $7.9 million in the twelve months ended June 27, 2021.

AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base during the period.

To probably no ones surprise, the companies sales have shifted towards drive-thru especially in 2020 and 2021.

Growth Plans

The plan is to open 7 new restaurants by the end of 2021.

Since 2015, they have opened new restaurants at a compound annual growth rate of approximately 9.3%. Over the long term, they plan to increase the number of restaurants by approximately 10% annually. 

They see the long-term opportunity to grow to more than 600 restaurants domestically over the next 25 years and are well-positioned for global growth in the future. This feels like a Peter Lynch investing moment (when he references taco bell’s growth of restaurants in the US).

We can use these numbers above to give us an idea of possible revenue/profit expansion going forward if they have similar comps and margins to current operating restaurants.

Financials

Taking a look at the metrics below along with the financial statements we can compare their current profitability vs. competitors for the past 2 quarters (what was given for 2021 for Portillo’s). 

They quote chipotle as someone they see as on the same level and so we can use them as a comparison throughout this analysis.

Q1-Q2 2021

Portillo’s EBITDA Margin: 19.8%

Chipotle’s EBITDA Margin: 16.2%

Portillo’s Net Profit Margin: 5.3%

Chipotle’s Net Profit Margin: 8.7%

2020 vs. TTM

Portillo’s TTM Revenue Growth : 4.4%

Chipotle’s TTM Revenue Growth: 14.3%

So while it looks like Portillo’s has slightly better EBITDA, it seems like that was a big highlight in the S-1 for a reason 🙂 I mean they don’t have the scale of Chipotle to absorb more overhead and SG&A to get to a higher net profit margin, but the revenue growth doesn’t necessarily get the same excuse.

If I compare the projected revenue growth for Chipotle for the next 5 years, they also seem to be growing at a higher expected pace of around 15%. 

So let’s look at the expected valuation vs some of the sales expectations to see if the multiples are slightly lower than what Chipotle is fetching (they should be based on the numbers above otherwise Portillo’s would be trading at a premium in comparison).

Let’s use the valuation of around $1.3 billion for Portillo’s. That means that at current trailing twelve months they have a P/S ratio of around 2.7 compared to 7.44 for Chipotle (so they are trading at a lower multiple).

If you look at P/E they are trading around 100 (Chipotle is closer to 90). Looking at P/E alone doesn’t mean much to me as I like to look at the expected 5 year growth expectation for EPS to give the P/E more meaning and for me to calculate the PEG ratio.

What is nice about Chipotle I can find the expected EPS growth rate for the next five years and it is around 44%, which gives a PEG ratio of around 2.04 (while not the best, it isn’t absolutely bonkers).

I can try to estimate the EPS growth for Portillo’s by taking the net profit margin and restaurant expansion plans of 10% with some same store sales expansion of 2.5% factored in.

I get a EPS growth rate of around 28.4% or a PEG of 3.52, which would be a little high for my taste. If I factor in 1% net income growth each year getting to around chipotle net profit margins 5 years out, I get the following.

Then the PEG comes more in line and the EPS growth looks much better, but that is assuming revenue growth and margin expansion to levels near chipotle is probably a bit of a stretch.

Conclusion

Based on everything I’ve laid out above, the problem I have with this company is the growth vs. the valuation. I need more financial history proving they can improve margins overtime and hit those revenue growth expectations. I just need more data points. 

I was honestly surprised by the 10% growth rate of restaurants (thought that was a little low), but they do tend to have unique styles for each restaurant and it seems like they spend a lot of time on location selection (much pickier than companies like chipotle who don’t need as much space as a Portillo’s).

Unfortunately in the world of food, the margins tend to be pretty small so I would want higher growth rates on revenue for the current multiples it would trade at with the IPO price.

For now, I’ll keep a watch on it, but I’ll pass on the IPO at these valuations. 

As for those that do end up investing, I’ll assist by continuing to visit the Portillo’s near me once and a while and ordering my Chicago style hot dog, cheese fries, with a Barq’s Rootbeer 🙂

Damn, and I really wanted the price to be right on this one. But IPOs (especially in 2020 and 2021) tend to be a little pricey.