The US and Chinese economies tend to take up all the oxygen in the room – but the ‘global south’ is on track to become the world’s driver in population and economic growth. Savvy investors will find plenty of opportunities there. Latin America, the vast and frequently overlooked region south of the Rio Grande, typifies both the risks and the potential rewards of the developing world’s retail sector.
With 667 million people, a rising middle class growing in wealth, the ability to build savings, and access to credit, along with a variegated quilt of countries and tastes, Latin America has something to offer investors of all stripes. It is hardly one-size-fits-all, with national per-capita incomes ranging from $3K or less at the low end to $15,400 in the middle-of-road Chile, and $24K to $31K in Puerto Rico and the Bahamas, Latin America’s per-capita incomes. The growing Latin middle class is fueling an expansion of the region’s credit industry, which is now recovering from the contractionary pressures of the COVID pandemic period.
Watching developments in Latin America for the investment giant Jefferies, analyst Pedro Baptista writes, “We believe that the cost of risk has peaked in Brazil, and retail consumer finance growth should accelerate from now and support retail sales, particularly for those companies that have been more dependent on credit…”
Against this backdrop, Baptista has picked up two consumer-oriented stocks with Latin American roots that investors should take into consideration. These are Buy-rated equities with the potential for double-digit gains in the coming year. We’ve used the TipRanks platform to pull up their details, and we’ll look at those alongside Baptista’s comments.
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Arcos Dorados Holdings (ARCO)
We’ll start in the world of fast-food franchising. While this niche may have originated in the US, it has spread to every corner of the world, and Arcos Dorados Holdings takes full advantage of that. The company is Latin America’s largest owner of McDonald’s franchises and is also the world’s largest independent McDonald’s franchisee. Arcos holds the exclusive right to own, operate, and grant franchises for McDonald’s in 20 Latin American countries.
The company has effectively exercised this right, with over 2,300 Latin American McDonald’s restaurants currently owned and operated by Arcos or its sub-franchisees. These restaurants employ over 95,000 people in modern, well-equipped locations operating under the iconic McDonald’s brand. Arcos adds local flavor to its business by offering the expected fare while incorporating regional flavors into the menu.
McDonald’s is a dynamic franchise company, having invested billions in upgrades and remodeling of its restaurant locations over the last 5 years. Arcos has fully embraced this improvement plan, using it to implement an ‘omnichannel approach’ to enhance customer service. Key aspects of the improvements Arcos has been implementing include upgrades to physical appearances and digital capabilities in the restaurants.
These improvements have coincided with Arcos’ recovery from the COVID-19 pandemic. In the fourth quarter of 2020, the company returned to profitability after the pandemic and has remained profitable since. Revenues over the past two years have shown an upward trend. In the most recent reported quarter, 3Q23, Arcos achieved a top-line revenue of US$1.1 billion, marking a 22% year-over-year increase and surpassing the forecast by US$10 million. The firm reported earnings of 30 cents per share, which exceeded expectations by 10 cents, or 50%. These results were supported by robust systemwide comparable sales, which grew by more than 37% year-over-year.
Jefferies’s Pedro Baptista is bullish on the company’s cash flow, real estate position, and ability to generate returns. He states, “Arcos Dorados’ franchise model drives a resilient cash flow stream. Arcos pays to the different landlords for franchise restaurants an estimated 5% of sales and collects 12% of sales (varies from sub franchisees), an important contributor to operating profitability. Arcos has to secure the real estate under the Master Franchise Agreement (MFA) and the restaurant box, independent whether franchised or owned, and the real estate margin funds the investment (construction costs) at an attractive rate of return.”
Looking ahead, the analyst is not shy about predicting continued profitability and growth, noting, “We estimate EBITDA and EPS 2022-2027E CAGR of 18% and 22% respectively. We also estimate that the firm’s current network of outlets is worth US$1.5bn on a replacement value basis, more than half of Arcos Dorados’ current enterprise value. As such we believe that the firm’s shares provide a relevant element of asset-backing.”
For Baptista, all of this adds up to a Buy rating on the stock, with a $15 price target to point toward a 25% gain in the next 12 months. (To watch Baptista’s track record, click here)
Overall, Arcos’ shares have a Moderate Buy rating from the analysts’ consensus, based on 3 recent reviews that show a 2 to 1 split for Buy over Hold. The stock is selling for $12.01 and its average target price of $14.50 suggests the shares will gain ~21% over the course of 2024. (See ARCO stock forecast)
PriceSmart, Inc. (PSMT)
The big-box membership warehouse store has become a popular retail model in the US, offering customers access to bulk purchases and discount prices in exchange for a yearly membership. This model incentivizes customers to shop in the warehouses, accumulating enough price discounts to offset the annual membership fee.
PriceSmart has expanded this model into Latin America, entering the market back in the 1990s and currently operating 53 membership warehouse stores in Central America, the Caribbean, and Colombia.
The largest of PriceSmart’s South American outlets is its Colombian operation, with 10 stores in the country. Following that, Costa Rica and Panama each have 8 and 7 stores, respectively, while Guatemala has 6. Other markets in the region have 5 or fewer PriceSmart warehouses.
The company follows an active expansion policy and has recently announced two new store openings. The first, the 10th in Colombia, was announced on September 1 of this year, marking the second store in the city of Medellin. The more recent announcement, made on December 1, introduced the 6th store in Guatemala, which was constructed on a 5-acre property. Another opening is planned for Santa Ana, El Salvador, in February of next year, marking PriceSmart’s 54th location.
PriceSmart follows a two-fold growth strategy, focusing on real estate acquisitions and robust customer service. Real estate acquisitions encompass locations for both warehouse stores and distribution centers, while customer service includes a variety of offerings and products, such as wellness services and a wide range of merchandise in the region’s only membership warehouse chain.
The company recently reported its financials for fiscal 4Q23, revealing a 10% year-over-year increase in net merchandise sales, totaling $1.12 billion, surpassing estimates by more than $20 million. PriceSmart’s bottom line, the non-GAAP EPS of 65 cents per share, fell short of the forecast by 16 cents.
For analyst Baptista, the key points here are PriceSmart’s smart focus on the combination of real estate and customer value as drivers for ongoing growth. He writes, “PriceSmart is focused on driving growth through new real estate, both clubs and distribution centers; enhancing Membership Value with wellness services that include optical, pharmacy, audiology and private label; driving incremental sales through digital channels that include pricesmart.com and differentiated merchandise… The company has proven to be a consistent compounder growing revenues at 9.9% CAGR over the past five years with 15% EPS CAGR in the same period. We believe growth will remain robust with a superior ROIC, that is not reflected in the company’s valuation.”
This stance backs up the analyst’s Buy rating, and his $82 price target implies a one-year upside potential of 17%.
Overall, there are only 2 recent analyst reviews on PSMT shares, and they are evenly split – 1 to Buy and 1 to Hold – for a Moderate Buy consensus rating. The average price target matches the Jefferies view, at $82. (See PriceSmart stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.