Shares of El Pollo Loco Holdings Inc Tumble on Growth Outlook; the Reaction May Be Short-Sighted

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Source: Coolcaesar at Wikimedia Commons.

What: Shares of El Pollo Loco Holdings Inc fell as much as 16% on Friday after the company reported first-quarter results that exhibited disappointing comparable-restaurant sales. Shares were down about 14% as of 1 p.m.

Now what: As the following table demonstrates, El Pollo Loco actually beat Wall Street's expectations with regard to both revenues and earnings per share in the first quarter:

*Adjusted Source: Thomson Financial Network, El Pollo Loco Holdings

However, at $0.69, the midpoint of the guidance range for full-year earnings per share is a penny shy of the consensus estimate. Furthermore, systemwide (i.e., company-operated and franchise restaurants) comparable-restaurant sales grew at 5.1%, below the 5.5% analysts were looking for, according to a survey by Consensus Metrix (hat-tip to Reuters). At company-operated restaurants, traffic rose just 0.1% -- the slowest rate since El Pollo Loco became a publicly traded company last July. For 2015, El Pollo Loco expects systemwide comparable-restaurant sales growth of 3% to 5%.

Nevertheless, despite the market's unambiguous reaction, it's worth keeping these numbers in perspective. As CEO Stephen Sather pointed out during the company's earnings conference call, "the [5.1%] increase in comparable sales growth marked our 15th consecutive quarter of positive same store sales and came on top of a 7.2% growth last year." That's not the only avenue for growth, naturally -- Sather said that "switching to development, our pipeline continues to be robust and positions us for 8% to 10% unit growth over the long-term."

So whatAt 24 times trailing earnings and 38 times cash flow, per research firm Morningstar, shares of El Pollo Loco sport a bona fide growth stock valuation. As such, even small stumbles with regard to growth expectations can produce a significant rerating of the stock, particularly in a market in which there is an increasing number of alternative issues. Nevertheless, it's not at all clear that this most recent set of results represents a major blow to the long-term thesis for owning the shares, which is what today's price action would suggest. Long-term shareholders ought to remain calm while verifying that for themselves.

The article Shares of El Pollo Loco Holdings Inc Tumble on Growth Outlook; the Reaction May Be Short-Sighted originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.