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Arcos Dorados Holdings Inc. (NYSE:ARCO), which is in the hospitality business, and is based in Uruguay, received a lot of attention from a substantial price movement on the NYSE over the last few months, increasing to US$8.30 at one point, and dropping to the lows of US$7.20. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Arcos Dorados Holdings's current trading price of US$7.75 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Arcos Dorados Holdings’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
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 28.22x is trading slightly above its industry peers’ ratio of 24.93x, which means if you buy Arcos Dorados Holdings today, you’d be paying a relatively fair price for it. And if you believe Arcos Dorados Holdings should be trading in this range, then there isn’t really any room for the share price grow beyond what 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.
What kind of growth will Arcos Dorados Holdings generate?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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. With profit expected to grow by 70% over the next couple of years, the future seems bright for Arcos Dorados Holdings. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? It seems like the market has already priced in ARCO’s positive outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at ARCO? Will you have enough confidence to invest in the company should the price drop below its fair value?
Are you a potential investor? If you’ve been keeping tabs on ARCO, now may not be the most optimal time to buy, given it is trading around its fair value. However, the positive outlook is encouraging for ARCO, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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