JPMorgan Upgrades Fogo De Chao To Buy: Here's Why

In a report published Wednesday, JPMorgan analyst John Ivanko upgraded shares of Fogo De Chao Inc FOGO to Overweight from Neutral with an unchanged $24 price target following the stock's weakness in which it dipped to 52-week lows of $18.32 before rallying.

According to Ivanko, many comp drivers exist for the restaurant chain. These comp drivers either exist in its current form, have recently been announced, or a future initiative that has yet to be implemented. One such initiative includes the company's recent expansion to include Sunday lunch at all restaurants in the United States. Following the launch, daypart added 40 percent to the most recent quarterly comp of 4.2 percent and is expected to contribute 340 basis points to comps on an annual run-rate basis.

Other successful initiatives include the launch of the Malagueta shrimp cocktail appetizer (over 30,000 sold in the first half of 2015 at a $19 price point) while a "re-focus" on Bar Fogo resulted in add-on sales and increasing guest visits. This implies the company is focused on seeing its initiatives succeed both in the present and in the future.

Meanwhile, Fogo De Chao has been working behind the scenes and has done an "excellent" job in managing its COGS (cost of goods sold) from 31.6 percent in 2012 to 29.9 percent in 2014 – at a time when beef costs rose 19 percent. In fact, beef represents approximately 42 percent of COGS, and the commodity looks to have hit peak levels, implying the company may see benefits heading into 2016.

Bottom line, the analyst suggested that investors take advantage of the "price driven weakness," especially when considering the brand can successfully expand from a current 26 units in the US to around 100 units over the longer-term.