Arcos Dorados (NYSE:ARCO) has been every kind of lousy, falling another 28% since the last time I wrote about the stock.
Since that last article, the situation in Venezuela has gotten worse
and between Brazil, Argentina, Venezuela, and Mexico, Arcos Dorados has
problems in markets that represent around 90% of the business. If that
wasn't enough, I believe management's options to improve margins are
more limited than I previously appreciated and the company is
uncomfortably sandwiched between capex obligations to McDonald's (NYSE:MCD), violations of its debt covenants, and limited cash flow prospects.
Even
with a hack-and-slash to growth expectations, shares could be more than
30% undervalued on a long-term cash flow basis but I have to admit less
and less confidence in the long-term outlook for Arcos Dorados.
Instead, I'm more willing to value the stock on 8x 12-month EBITDA,
which works out to just $7/share. Maybe my capitulation here marks some
sort of bottom, and I do still believe that the combination of
McDonald's brand value and an under-penetrated fast food/quick service
sector in Latin America can still produce value, but you have to have an
iron-clad risk appetite to hold this name right now.
Read the full article here:
Arcos Dorados Hits Bottom, Finds A Shovel
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