My ideal growth stock would have a few traits. First, I'd like for it to do business in a large market. I'd also like for the business to be quantifiably better than many of its competitors. And I'd also want it to be a financially strong company. Finding something like this at a dirt cheap valuation would also make it a timely idea.
This is why I'm excited to highlight restaurant company Portillo's(NASDAQ: PTLO) in this article. The market has entirely disregarded the Chicago-based purveyor of Italian beef, burgers, Chicago-style hot dogs, and other local favorites ever since its market debut in 2021. But that's a mistake -- and it's a growth stock worth a $1,000 investment today. Here's why.
Why Portillo's is the ultimate growth stock
I should preface this by saying that there are plenty of businesses with higher growth rates. But what makes a Portillo's investment so compelling is that there's a margin of safety. For starters, the restaurant space is easily understood and isn't prone to innovation cycles like the tech space. One can easily understand the finances of a restaurant and reasonably predict consumer demand.
Furthermore, Portillo's has a margin of safety, since its valuation is inexpensive. As of this writing, the stock trades at just 1.1 times its trailing sales, close to its lowest since going public. Consider that Texas Roadhouse stock trades at about twice this valuation.
The valuation for Texas Roadhouse stock is double what it is for Portillo's stock. But when it comes to the business fundamentals, Portillo's can go toe-to-toe with Texas Roadhouse all day.
At the end of 2023, Portillo's had 84 restaurant locations, the majority of which are in the Midwest. But it opened 12 new locations in 2023, emphasizing newer markets such as Florida, Texas, and Arizona. Its market research says it could ultimately have 600 locations across the U.S., giving it plenty of long-term growth opportunity.
Diners outside of the Midwest appear to love Portillo's just as much, if not more than, folks from Chicago. One of the company's first restaurants in Texas did $8.5 million in sales in the first half of 2023 alone. Management hasn't updated that number since. But it's a testament to its growth potential in new markets.
Portillo's ongoing growth in existing markets is impressive as well. Same-store sales (a measure of sales at locations open for two years or more) were up 5.7% in 2023.
With its same-store sales climbing, Portillo's does a lot of sales volume per location. In 2023, the company had average unit volume of $9.1 million, which was up 7% from 2022.
For perspective, Texas Roadhouse gives a quarterly number, not annual. But in the fourth quarter of 2023, Texas Roadhouse had average unit volume of $1.9 million, which annualizes to a little less than $7.6 million. In other words, Portillo's handles more volume. Indeed, few restaurants have sales volume as high as Portillo's.
There's a reason to take note of sales volume. Higher volume often translates into higher profitability. And for Portillo's, that's certainly the case. In 2023, the company's margin for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was 24% at the restaurant level. This excludes corporate expenses so it can be a good way to project profitability as the business scales and corporate expenses become a smaller percentage of revenue.
That said, Portillo's is already profitable as a whole, with $55 million in operating income in 2023. With a market cap of $830 million as of this writing, this stock only trades at 15 times its operating income today, which (like the sales valuation) is another cheap valuation multiple.
That's Portillo's in a nutshell. The business metrics are good, its popularity among diners is growing, it has plenty of room to open more locations, and its stock is quantifiably cheap.
There's a reason I continually compared Portillo's to Texas Roadhouse. They are similar because they're both casual-dining restaurant chains. But I believe the upside potential is similar. For the past decade, Texas Roadhouse has average top-line growth in the low double digits -- 10% to 14% year-over-year growth is common. And yet, the stock is up roughly 500% in the past 10 years.
I believe Portillo's investors are looking at similar potential. Growth should be modest for a growth stock, but consistent. Consistent growth should lead to market-beating stock returns. And this market-beating potential comes with low risk, which is a reason to invest $1,000 in it today.
Should you invest $1,000 in Portillo's right now?
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Texas Roadhouse. The Motley Fool has a disclosure policy.
