Macquarie Says Buy Fogo De Chao 'For US Sizzle,' Sees Concerns In Brazil 'Overcooked'

• Macquarie initiated coverage of leading Brazilian steakhouse companyFogo De Chao Inc FOGO on Thursday.
• The firm issued an Outperform rating and $20 target price for the stock.
• Shares of Fogo De Chao rose almost 1.5 percent on Thursday trading.

In a report issued Thursday, Matthew Brooks issued an Outperform rating and $20 price target for Fogo De Chao, noting that the company offers a profitable model, with plenty of room for growth and exposure to upscale US consumers.

The expert assured the firm believes “the strength of the US domestic economy will support the US roll-out and lead to a near-doubling of their US restaurant base over the next five years.”

The note continued to state that, in Macquarie’s view, the key to Fogo’s model’s success are the gaucho chefs who both cook and serve the meals. This helps the company reduce labor costs, which stand around 23 percent of sales – versus its peers’ average of 31 percent. So, while Fogo’s food costs are slightly higher, the difference of roughly 2 percent does not offset the difference in labor costs, thus leading to more profitable restaurants. “Couple this with the high sales per unit and fast maturation, and FOGO expects to deliver cash-on-cash returns of around 40%,” Brooks assured. “This is nearly one-third higher than other upscale/casual dining peers at 29%.” Driven by the US roll-out, the firm estimated Fogo could retrieve an EPS CAGR to 2020 of 21 percent per year.

But wait! There’s a second part to the Fogo growth story: “comp sales growth, and two key drivers here are large group sales and Sunday lunch,” the expert explained.

Brazil, IPO and lock-up concerns create buying opportunity

Macquarie then went on to look into valuation. In their view, Fogo’s stock is cheap mainly due to the sluggishness in the Brazilian economy and poor sales in the country.

The analyst went on to explicate that, “FOGO has also underperformed with other recent IPOs, as signaled by the 7% underperformance of the Renaissance Capital IPO ETF vs the Russell 2000. Lastly, there is the overhang of the 80% of FOGO still owned by THL, as the 180-day lock-up expires in mid-December 2015. But with above-average profitability, a 21% EPS CAGR to 2020e driven by US network expansion and at a 28% discount to the US restaurant sector,” the firm sees the stock as a good buying opportunity.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.