Long on Chicken and Short on Crab

Steve Kanaval |

Shark_Crab.jpg

A Tale of Two Restaurants

I was looking at earnings reports today, and I noticed one restaurant group was higher - El Pollo LoCo Holings Inc. (LOCO)  - and one was down - Ignite Restaurant Group Inc. (IRG) . It makes me ask myself why anyone ever gets into the food business at all. It's the most difficult business, with multiple variables, and it is one of the few sectors where you can have steady demand across the landscape, yet have opposite results based on execution.

Let's start with the bad - Ignite Group, which has been in a downtrend since summer 2013. The MarketCap has eroded from around $580M to $178M in a year-and-a-half, and while the company operates three restaurants under the Joe's Crab Shack, Brick House Tavern + Tap, and Romano's Macaroni Grill brands, they missed again on revenue projections. The stock is dangerously tweaking, setting off sell alarms among long side players, and today's news continues to please shorts in the stock. 

The company's adjusted net loss (a non-GAAP measure) was $6.4 million, or a loss of $0.25 per diluted share, compared to an adjusted net loss of $4.1 million, or a loss of $0.16 per diluted share in the fourth quarter of 2013. They achieved this loss while having a larger top line than previous years. This is bad news, and understand when stocks fall below $10 per share, (IRG is $6 or so), they rarely ever, ever get back above the $10 level. Again, this is bad news.

Going Crazy for the Chicken

El_Pollo_Loco.jpgLets look at El Pollo Loco. The company's share price surged approximately 9% in aftermarket on Thursday, after the company reported better-than-expected fourth quarter 2014 results. Also, a strong earnings guidance for 2015 boosted shares. This marked third quarterly results for this quick-service restaurant's company since its Initial Public Offering in June of 2014.

Adjusted earnings of 14 cents per share (including the positive impact of an extra week in the quarter) beat the Zacks Consensus Estimate of 12 cents by 16.7%, and went up approximately 55.5% year over year. Excluding the impact of the extra week, earnings per share were 13 cents that also beat the consensus mark by 8% and went up approximately 44% year over year. The upside reflects an improvement in revenues and margins for LOCO.

It is important to understand that LOCO is not without blemishes, because in November of 2014 (just a few short quarters ago), shares in El Pollo Loco were $38 per share, and were cut in half by year end, just 60 days later to $19. Today was the first time the chicken has seen it's day since the IPO, so for now it's good to be long chicken and short crab!

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
IRG Ignite Restaurant Group Inc. 0.22 -0.03 -11.68 297,109
LOCO El Pollo Loco Holdings Inc. 12.55 -0.20 -1.57 237,886

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