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.

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Arcos Dorados Hits Bottom, Finds A Shovel

Seeking Alpha: Arcos Dorados Still Several Fries Short Of A Happy Meal

It's tough to grow a business when two large markets are convulsing under the weight of horrible macroeconomic mismanagement, but Arcos Dorados (ARCO) isn't going to get a free pass just because the problems in Argentina and Venezuela are not its fault. Inflation, affordability, and competition remain challenges across the company's operations and I don't fault investors who want nothing to do with another Latin American consumer stock groaning under the weight of macroeconomic issues.

The shares of Arcos Dorados are down about 10% from when I last wrote, and the story remains frustratingly similar. There is significant growth potential in the business, as it could double the number of McDonald's (MCD) stores it operates over the next decade, but potential isn't worth much if the actual results don't get better.

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Arcos Dorados Still Several Fries Short Of A Happy Meal

Seeking Alpha: Arcos Dorados Stronger Than Its Stock

It's cold comfort for shareholders, but it seems like Arcos Dorados (ARCO) has gotten sucked into the same "anti-polar" vortex as many other consumer-oriented Latin American stocks. With the USD/BRL exchange rate moving from 2.03 to 2.37 over the past year and the USD / MXN rate moving from 12.67 to 13.08, worries about consumer spending trends in markets like Brazil and Mexico and the economies of Argentina and Venezuela are almost secondary.

The good news is that, as an operating company, Arcos Dorados is still doing pretty well. Sluggish comp growth in Brazil is a worry, but comps have generally been picking up and margins seem to have stabilized. I'm looking for strong comp growth and unit expansion to drive revenue growth, and I believe the shares are meaningfully undervalued today. All of that said, investors are going to have to be able to deal patiently with the ups and downs of currency movements or take a more aggressive view towards entering, exiting, and re-entering the shares.

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Arcos Dorados Stronger Than Its Stock

Investopedia: Arcos Dorados Still Several Fries Short Of A Happy Meal

Investors who bought Arcos Dorados (Nasdaq:ARCO) thinking they were getting McDonald's-like (NYSE:MCD) consistency with a Latin American growth kicker have been badly surprised over the past year, as Arcos Dorados' performance has lagged its franchiser's performance by roughly 25%. A lot of what has hurt the company is arguably out of management's control, as weakening consumer conditions across much of Latin America (including Brazil and Mexico) and persistent inflation make operations much more challenging. Although these shares do appear undervalued relative to their long-term potential, management has a lot of work to do to realize that potential.

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Investopedia: Starbucks Shows Why It's Starbucks

Alright, Will Ashworth, you win this round! One quarter ago, fellow Investopedia writer Will Ashworth took issue with me seeing limited appreciation potential in Starbucks (Nasdaq:SBUX) and laid out a case that Starbucks was still a good buy. With the stock up about 22% over the last quarter, blowing away other restaurants like McDonald's (NYSE: MCD) and other consumer stocks in general, there's little else for me to do but see where I got Starbucks so wrong and reevaluated where it can go from here.

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Investopedia: McDonald's Has Eased Off, But Hardly Cheap

It seems as though gravity is finally weighing on the valuations in the consumer space, as stocks like Nike (NYSE:NKE), Coca-Cola (NYSE:KO), and McDonald's (NYSE:MCD) have underperformed over the past quarter. Worries tied to the ongoing sluggishness in China and margins may be the preferred talking points, but it's hard to overlook how expensive many of these consumer stocks got.

Turning back to McDonald's, there are now some worries about near-term performance, as management's comments on same-store sales suggest slowing growth. While I think selling McDonald's shares because of a couple months' worth of same-store sales is more of a justification than a reason, and I have every confidence that McDonald's will continue to find ways to continue growing, the shares are still well above what I'd call bargain territory.

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Investopedia: Yum! Brands On Simmer For Now

Given that the company's troubles in China are very well known now, there's not much for Yum! Brands (NYSE:YUM), or its shareholders, to do but wait for things to get better. The company continues to look for growth in other emerging markets, while driving good profits from its U.S. operations, but it's going to take a while for markets like India, Russia, or Africa to make a difference relative to China. In the meantime, the shares don't look like that much of a bargain.

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Investopedia: Femsa Is A Delicate Balance Between Growth Opportunities And Valuation

As a business, I love Femsa (NYSE:FMX) (also sometimes spelled as FEMSA). This company is not only the co-owner of the second-largest Coca-Cola (NYSE:KO) bottler in the world, but it operates one of largest retail platform in Mexico and is now looking to expand into new retail markets and new geographies. On the other hand, however, excitement over Femsa's stock has got to a pretty fevered level recently before selling off, and while the company's prospects are quite good, the stock is not exactly a cheap option on that growth.

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Investopedia: Smithfield Gets Its Deal, But From A Surprising Bidder

Investors had been agitating for Smithfield (NYSE:SFD) management to “do something” to increase the value of their shares, and their wishes were answered in spades on Wednesday. The largest pork producer in the U.S. announced that it had accepted a bid to be acquired by China's Shanghui International in an all-cash deal that awards a pretty hefty multiple to this protein producer.

The Deal To Be...
If the deal goes through as announced, Smithfield investors will receive $34 in cash for each share they own. That works out to a 31% premium relative to Tuesday's close and just barely less than the all-time high for the stock.

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Investopedia: Chipotle Executing Well, But Valuation Leaves No Margin Of Error

Investors can be slow to abandon their favorite growth stocks, particularly when management has shown itself able to execute at a high level. Couple that with a very strong sector and you have a good recipe for Chipotle Mexican Grill (NYSE:CMG) to perform. While the shares are still down almost 10% from their year-ago level, they are up almost 60% from a late October bottom and investors seem to be willing once again to just look past challenging same-store traffic trends.

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Investopedia: The Market Seems Unwilling To Let Yum! Brands Stay Cheap For Long

When I last wrote on Yum! Brands (NYSE:YUM) in early February, I thought the shares were cheap relative to the long-term value but likely wouldn't stay cheap for very long. With the shares already up 10% since then, it looks like that call is working out. It's true that the news from the company's large China operations remains weak, but I believe the worst has passed and the company still has a global growth story to drive the stock.

China Is Still Bad, But Maybe Not As Bad As Feared
China has been a major source of growth and profits for Yum! Brands for quite some time now, but that growth has gone sharply the other way lately on a one-two punch of supplier quality problems and the avian flu. While I don't want to soft-peddle this development, I think it's hasty to assume that the company's KFC brand has really lost any real long-term value in this huge market.

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Investopedia: Sysco's Reputation Seems More Durable Than Its Growth

When a stock holds enduring favor with a patient investor base and the stock is part of a sector that has enjoyed a big upswing in investor interest, that can be a powerful combination. That's about the only explanation that makes sense to me as to why Sysco (NYSE:SYY) shares are up more than 20% over the past year despite slowing sales and difficulties/delays in reducing operating costs. While Sysco remains a very good company, it's harder today for me to make the argument that it's an equally good stock.

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Investopedia: Will Tyson Serve The Bulls Or Serve Up The Bulls?

It's really too bad that Tyson Foods (NYSE:TSN) doesn't offer a breaded or Buffalo-style crow, as I have to eat a plateful of it with this stock. I didn't like this stock back in the fall of 2012, and thought that the post-earnings reaction then was overdone. As it turns out, though, the stock had another 28% left to appreciate, making it a very solid performer in what has been a strong consumer sector overall.

At the risk of doubling down on a bad call, I'm still not very partial to this stock. Although I do believe that Tyson has the opportunity to grow its international and packaged foods businesses and generate meaningfully better margins, this quarter's margin under-performance highlights just how challenging it can be to deliver on a quarter-to-quarter basis. In the context of what increasingly looks like an overheated consumer sector, I'd be careful about piling into Tyson shares today.

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Investopedia: Starbucks' Special Model Is Valuable, But Maybe Not This Valuable

Normally talking about “liquid meals” is something reserved for college students, but the reality is that Starbucks (Nasdaq:SBUX) has long since proven that there's room in the quick service restaurant (QSR) for something other than burgers and sandwiches. Starbucks has likewise capitalized on the brand value it built through its stores by establishing a significant retail/commercial presence that few restaurants come close to matching.

I don't want to make the mistake of underestimating what Starbucks can become. There's still ample room for store expansion in much of the world, not to mention additional products in the retail channel and follow-on markets like teas and pastries.

The only question I have is what this is all worth. On one hand, Starbucks doesn't seem priced all that out of line with successful QSR operators like McDonald's (NYSE:MCD), Chipotle (NYSE:CMG), or Dunkin' (Nasdaq:DNKN), nor successful packaged food and beverage companies like Coca-Cola (NYSE:KO), Mondelez (Nasdaq:MDLZ), and Nestle (OTC:NSRGY). On the other hand, investors have to either expect strong high-teens free cash flow (FCF) growth for at least another decade or accept relatively unimpressive expected annual returns for today's valuation to make a lot of sense.

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Investopedia: Does A Tough Patch Really Matter To McDonald's Shareholders?

Excellent earnings consistency and a long history of dividend payments will buy a lot of patience and support from investors. Consequently, I find it hard to imagine that even this disappointing patch of weak same-store sales will really dent McDonald's (NYSE:MCD) all that much. Though I'm not very fond of the multiples being paid for consumer stocks these days and won't be looking to add McDonald's to my own portfolio, I don't expect a mass exodus from these shares unless the market as a whole takes a tumble.

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Investopedia: Sonic Still In A Tricky Spot

Try as it might, drive-in quick service restaurant (QSR) Sonic (Nasdaq:SONC) just can't seem to get everything working at top form in its business model. While the company has an innovative (some might say “quirky”) menu that really does stand out from the offerings at McDonald's (NYSE:MCD), Burger King (NYSE:BKW), and Wendy's (NYSE:WEN), and has looked to refine its promotional activity and value-priced offerings, the company has made only modest progress in terms of growth.

As it stands today, analyst expectations on Sonic are pretty bifurcated. There's a small group that believe that Sonic will regain its growth momentum and do significantly better from here, while the larger group is more pessimistic and calls for Sonic to basically bump along as it has for some time now. While these shares have been strong over the past year and have recently broken out to a multi-year high, further gains could well be in store if the optimists are right.

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Seeking Alpha: Arcos Dorados Somewhere Between Gold And Scrap Iron

For the most part, investors can't seem to get enough of Brazilian consumer stocks, bidding many of them up to exceptionally demanding valuations. And to be fair, many of these companies are producing pretty solid growth numbers. In the case of Arcos Dorados (ARCO), though, a combination of sluggish comp-store growth, rampant cost inflation, and fears of competition seem to be combining to create a stock that many investors are pretty ambivalent about today. While it is important that investors not understate the risks to the Arcos business model, I think these shares could be an interesting speculative play at these levels.

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Arcos Dorados Somewhere Between Gold And Scrap Iron

Investopedia: Chipotle Still Getting The Benefit Of The Doubt

Last year was a rough one for Chipotle Mexican Grill (NYSE:CMG). Once a nearly bulletproof growth story, a sharp slowdown in traffic and store comps growth expectations took large chunks out of the stock on multiple occasions. Investors are slow to abandon growth stories (at least outside of tech), and these shares enjoyed a 30% rally to close out the year. Consequently, it's not easy to make a value call on the shares today, and investors should be wary of the expectations that traffic growth will accelerate in the second half of the year.

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Investopedia: Yum! Brands Still Has Indigestion, But Investors Have An Opportunity

Yum! Brands (NYSE:YUM) has stumbled into a perfect storm in China. Concerns about contaminated chicken at what is still a relatively expensive dining option have sent Chinese same-store sales plunging, robbing the company of its primary growth driver. The company has reset expectations significantly lower for 2013, and now the question is just how quickly (and perhaps "if") the company can put this stumble behind it. In the meantime, investors are looking at the nearest thing to a bargain in the shares as they are likely to see.

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Investopedia: McDonald's Seems Back On Track, But Not Cheap

Even some of the best-run companies in the world can make mistakes. McDonald's (NYSE:MCD) started 2012 betting on a turn in the economy and consumer sentiment, and tried to move customers up-market from its value offerings. That didn't work, and the stock lagged for the year. While McDonald's has retrenched around value and continues to deliver impressive profits, investors' perennial support for this company rarely allows it to get very cheap.

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