At US$8.55, Is Arcos Dorados Holdings Inc. (NYSE:ARCO) Worth Looking At Closely?
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Arcos Dorados Holdings Inc. (NYSE:ARCO), which is in the hospitality business, and is based in Uruguay, saw a double-digit share price rise of over 10% in the past couple of months on the NYSE. As a stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s take a look at Arcos Dorados Holdings’s outlook and value based on the most recent financial data to see if the opportunity still exists.
View our latest analysis for Arcos Dorados Holdings
What’s the opportunity in Arcos Dorados Holdings?
The stock seems fairly valued at the moment according to my relative valuation model. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Arcos Dorados Holdings’s ratio of 18.56x is trading slightly below its industry peers’ ratio of 19.32x, which means if you buy Arcos Dorados Holdings today, you’d be paying a reasonable price for it. And if you believe Arcos Dorados Holdings should be trading in this range, then there isn’t much room for the share price grow beyond where it’s currently trading. So, is there another chance to buy low in the future? Given that Arcos Dorados Holdings’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.
Can we expect growth from Arcos Dorados Holdings?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Though in the case of Arcos Dorados Holdings, it is expected to deliver a negative earnings growth of -2.2%, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.
What this means for you:
Are you a shareholder? Currently, ARCO appears to be trading around its fair value, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on ARCO, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on ARCO for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The price seems to be trading at fair value, which means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystalize your views on ARCO should the price fluctuate below its true value.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Arcos Dorados Holdings. You can find everything you need to know about Arcos Dorados Holdings in the latest infographic research report. If you are no longer interested in Arcos Dorados Holdings, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
