3 Reasons to Sell ARCO and 1 Stock to Buy Instead

Yahoo

02-04-2025

Over the past six months, Arcos Dorados's shares (currently trading at $8.42) have posted a disappointing 14.6% loss while the S&P 500 was down 1.7%. This might have investors contemplating their next move.
Is there a buying opportunity in Arcos Dorados, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it's free.
Even with the cheaper entry price, we're cautious about Arcos Dorados. Here are three reasons why we avoid ARCO and a stock we'd rather own.
Translating to 'Golden Arches' in Spanish, Arcos Dorados (NYSE:ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.
Forecasted revenues by Wall Street analysts signal a company's potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Arcos Dorados's revenue to rise by 3.9%, a deceleration versus its 8.6% annualized growth for the past five years. This projection doesn't excite us and indicates its menu offerings will face some demand challenges.
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
Arcos Dorados has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 13.4% gross margin over the last two years. Said differently, Arcos Dorados had to pay a chunky $86.55 to its suppliers for every $100 in revenue.
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Arcos Dorados broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
Arcos Dorados's business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at $8.42 per share (or 0.4× forward price-to-sales). The market typically values companies like Arcos Dorados based on their anticipated profits for the next 12 months, but there aren't enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Market indices reached historic highs following Donald Trump's presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
While this has caused many investors to adopt a "fearful" wait-and-see approach, we're leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.