Why Arcos Dorados Looks Delicious

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Arcos Dorados (NYSE: ARCO  ) , which operates McDonald's (NYSE: MCD  ) franchises in Latin America, climbed 3% today after J.P. Morgan upgraded it from "neutral" to "outperform."

So what: Along with the upgrade, analyst John Ivankoe raised his price target to $14 (from $13), representing about 19% worth of upside to yesterday's close. While momentum investors might be turned off by the stock's steady price decline over the past two years, Ivankoe thinks that Arcos could now be approaching a turning point given its seemingly improving financials.

Now what: According to J.P. Morgan, Arcos' operating conditions are better than they've been in a long time. "After missing estimates for several quarters, 2Q13 was the closest to low set expectations since the IPO," said J.P. Morgan. "We have revised estimates to currency implied by the futures curve, same-store sales trends implied by MCD, and associated improvements to margin in out years, but also with slightly lower unit growth expectations in Brazil due to modest permitting/construction delays." When you combine those improving trends with Arcos' beaten-down stock price -- still off 50% from its two-year highs -- I'd agree that the risk/reward trade-off seems scrumptious. 

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  • Report this Comment On October 30, 2013, at 11:41 AM, clearbranch wrote:

    Lower highs and a floor at about 10 bucks. I see no future here the rest of this year. Maybe next year after about July if the Big O doesn't finish wrecking the country by then.

  • Report this Comment On October 31, 2013, at 8:23 AM, DNAstock wrote:

    The big O? Wrecking the country?

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