Why Arcos Dorados Holdings Inc. Shares Could Fly 45%

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Jun 9, 2014 at 10:02AM
Consumer Goods

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 analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Arcos Dorados Holdings (NYSE:ARCO) gained more than 6% this morning after Bank of America upgraded the Latin American McDonald's franchise operator from underperform to buy.

So what: Along with the two-notch upgrade, analyst Robert Ford Aguilar planted a price target of $14 on the stock, representing about 46% worth of upside to Friday's close. So while momentum traders might be turned off by Arcos' sharp pullback over the past year, Aguilar's call could reflect a sense on Wall Street that the company's growth prospects are now just too cheap to pass up.

Now what: According to B of A, Arcos' risk/reward trade-off is rather attractive at this point. "We reflect the adoption of SICAD II in Venezuela for '14, and a portion of incremental efficiency improvements we believe ARCO capable of in '15," said Aguilar. "Recent modification of Venezuelan rent law could enable more equitable economic adjustments with ARCO franchisees." When you couple that upbeat outlook with Arcos' cheapish PEG of 0.5, it's tough to disagree with B of A's bullishness.