TSX runs higher on rate cut expectations
Investing.com - JPMorgan downgraded Arcos Dorados Holdings (NYSE:ARCO) from Overweight to Neutral on Wednesday, while lowering its price target to $8.80 from $10.50. According to InvestingPro data, the stock currently trades at a P/E ratio of 12.4x, with analysts maintaining an average price target suggesting 29% upside potential.
The downgrade comes as JPMorgan cited persistent input cost pressures in Brazil that are expected to drive margin contraction this year and result in cash burn for the McDonald’s (NYSE:MCD) franchisee. The investment bank also noted potential downside risk to consensus estimates for both current and next year’s EBITDA. InvestingPro data reveals the company’s already thin gross profit margin of 12.85% and negative free cash flow yield of -3%.
Despite the downgrade, JPMorgan acknowledged that Arcos Dorados’ new Master Franchise Agreement with McDonald’s should structurally enhance EBITDA margins by 40-50 basis points on a run rate basis.
The bank highlighted several positive factors for the company, including higher exposure to freestanding locations in core Brazil markets and the modernization of stores primarily in NOLAD (North Latin America Division), which should support operating trends.
JPMorgan also noted that sales through digital channels and delivery should drive higher return on invested capital through better pricing capabilities, including order personalization and regional segmentation, along with fixed cost dilution.
In other recent news, Arcos Dorados Holdings Inc . reported first quarter earnings that missed analyst estimates, with earnings per share at $0.07 compared to the expected $0.15. Despite this, the company exceeded revenue expectations, posting $1.1 billion against the anticipated $1.05 billion. Systemwide comparable sales grew by 11.1% year-over-year, and digital sales increased by 6.3%, contributing to nearly 60% of total sales. However, consolidated adjusted EBITDA decreased by 16.2% to $91.3 million, with a margin drop from 10.1% to 8.5%. CEO Marcelo Rabach noted that the first quarter was expected to be the low point for the year, with improvements seen in March. Additionally, Arcos Dorados opened 12 new "Experience of the Future" restaurants and plans to meet its full-year target of 90-100 new openings. In leadership changes, Luis Raganato will become the new CEO, effective July 1, 2025, succeeding Marcelo Rabach, who will remain on the Board of Directors. Carlos Gonzalez will take on the role of Chief Operating Officer, also effective July 1, 2025.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.