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On Friday, Jefferies adjusted its outlook on shares of Arcos Dorados Holdings (NYSE:ARCO), the largest franchisee of McDonald's restaurants in Latin America and the Caribbean, by reducing the price target to $14 from the previous $15. Despite this change, the firm maintained its Buy rating on the stock.
The revision reflects a cautious stance due to the depreciation of several Latin American currencies, including the Brazilian Real (BRL), the Mexican Peso (MXN), and the Chilean Peso (CLP). The depreciation of these currencies has led Jefferies to lower its EBITDA estimates for Arcos Dorados by an average of 5% when measured in US dollars.
The analyst's commentary highlights expectations for continued mid-high single-digit same-store sales (SSS) growth in local currencies and further market share gains. Attention is drawn to the upcoming Master Franchise Agreement (MFA) renewal in August, which is anticipated to extend for another decade until 2037 without significant alterations to current royalty rates.
The new price target of $14 is based on a valuation of 6 times the estimated 2025 enterprise value to EBITDA (EV/EBITDA) and 15 times the price-to-earnings (P/E) ratio. These metrics are consistent with the historical averages for Arcos Dorados. Additionally, the analyst projects a compound annual growth rate (CAGR) of 13% for EBITDA over the next five years.
In other recent news, Arcos Dorados Holdings Inc ., the world's largest independent McDonald's franchisee, reported robust financial results for the first quarter of 2024. Significant growth in sales and EBITDA were attributed to the company's successful 3D strategy encompassing Digital, Delivery, and Drive-thru.
Digital sales made up 55% of system-wide sales, with delivery sales contributing 20% in Brazil. Despite a 20-30% decline in consumption in Argentina, Arcos Dorados managed to outperform the market and gain significant market share. However, the effective tax rate increased to 39.7% in Q1 2024 from 35.8% in the previous year.
On the analyst front, Goldman Sachs maintained its Buy rating on Arcos Dorados stock, setting a price target of $14.30. The firm's stance comes despite the stock's year-to-date performance, which saw a 28% decline.
Goldman Sachs analysts suggest that the current share price reflects market concerns over the upcoming renewal of its master-franchisee agreement with McDonald's Corp (NYSE:MCD). The firm believes that Arcos Dorados offers an attractive risk-reward balance in light of these developments.
These are among the recent developments for Arcos Dorados, which is also focusing on enhancing operational efficiencies and leveraging partnerships to bolster its delivery service. The company plans to implement its loyalty program across the region by 2025, aiming to provide a more personalized customer experience and improve sales, check size, and margin.
InvestingPro Insights
As investors weigh Jefferies' revised outlook on Arcos Dorados Holdings (NYSE:ARCO), it's worth considering some key financial metrics and insights from InvestingPro. With a market capitalization of $2.05 billion and a P/E ratio standing at 11.89, Arcos Dorados is trading at a valuation that seems to balance near-term earnings growth with its current earnings. Notably, the company has demonstrated a solid revenue growth of 15.8% over the last twelve months as of Q1 2024, underscoring its ability to expand in a challenging economic environment. Moreover, the company's dividend yield is at 2.47%, reflecting a 20% dividend growth over the same period, which could appeal to income-focused investors.
Two InvestingPro Tips relevant to Arcos Dorados include the company's significant debt burden and its status as a prominent player in the Hotels, Restaurants & Leisure industry. While the debt level requires careful consideration, the company's industry position could provide a competitive edge. For those looking for deeper insights, there are 9 additional InvestingPro Tips available that can further guide investment decisions. Interested readers can access these tips and take advantage of a special offer using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription at InvestingPro.
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