Tuesday, September 9, 2014

Seeking Alpha: Arcos Dorados Hits Bottom, Finds A Shovel

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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