Top-Line Improvement Slow But Steady At Arcos Dorados

Morgan Stanley upgraded Arcos Dorados Holding Inc ARCO to Overweight as it sees gradual recovery in topline, margins on stronger employment/wage trends and attractive valuation.

The brokerage said the company’s sales would benefit from increased penetration of chained fast food, McDonald's brand value and leading market share position, and competitive product portfolio.

Further, Morgan Stanley sees improvement in margins on lower restaurant operating costs, new automated scheduling system, and forex tailwind to food and paper costs from strong Brazilian currency.

“We also see a reduction in Leverage, which we believe could allow ARCO to resume its dividend policy in 18+ and gives it optionality to accelerate unit growth,” analyst Jeronimo De Guzman wrote in a note.

Guzman noted that Arcos trades at 6.7x 2017 estimated EV/EBITDA, a 50 percent discount to the median multiple of 13.1x for Restaurant Brands QSR peers. Shares are also trading about 22 percent off their historical forward multiple, compared to a premium for Brazil consumer stocks.

“We believe the shares can re-rate as growth accelerates and the company delivers more consistent results. We see 31% upside to our revised year-end 2017 price target of $8 (up from $5), which assumes the shares can trade at 8x'78 EBITDA in a year's time,” Guzman added.

At time of writing, shares of Arcos Dorados rose 6.15 percent to $6.47.