Why Arcos Dorados Looks Delicious

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While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Arcos Dorados , which operates McDonald's franchises in Latin America, climbed 3% today after J.P. Morgan upgraded it from "neutral" to "outperform."

So what: Along with the upgrade, analyst John Ivankoe raised his price target to $14 (from $13), representing about 19% worth of upside to yesterday's close. While momentum investors might be turned off by the stock's steady price decline over the past two years, Ivankoe thinks that Arcos could now be approaching a turning point given its seemingly improving financials.

Now what: According to J.P. Morgan, Arcos' operating conditions are better than they've been in a long time. "After missing estimates for several quarters, 2Q13 was the closest to low set expectations since the IPO," said J.P. Morgan. "We have revised estimates to currency implied by the futures curve, same-store sales trends implied by MCD, and associated improvements to margin in out years, but also with slightly lower unit growth expectations in Brazil due to modest permitting/construction delays." When you combine those improving trends with Arcos' beaten-down stock price -- still off 50% from its two-year highs -- I'd agree that the risk/reward trade-off seems scrumptious. 

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The article Why Arcos Dorados Looks Delicious originally appeared on Fool.com.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Arcos Dorados and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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