We recently compiled a list of 7 Cheap Food Stocks to Buy According to Analysts. In this article. we will look at where Arcos Dorados Holdings Inc. (NYSE:ARCO) ranks among the cheap food stocks to buy according to analysts.
The Resilience and Growth of the Fast Food Industry
Fast food companies are known for satisfying customers’ needs on many levels by providing quick service, being reasonably priced, and consistently creating new menu items. This global phenomenon is still growing today due to fast food chains’ capacity to appeal to a large consumer base, which has allowed them to expand globally and create enduring presences in international markets.
In the United States, in particular, a study by The Barbecue Lab found that over 83% of US households eat fast food at least once a week, and most Americans consume it one to three times a week. According to the report, many people believe that fast food is “relatively inexpensive compared to other dining options,” with over 32% of customers thinking this way about it. Despite popular belief, fast food is typically more expensive in real terms than home-cooked meals. Contrary to popular assumption, lower-class families do not rely on fast food because it is more affordable; rather, people with higher earnings tend to consume more fast food than people with lower incomes.
The food industry is essential and often seen as resilient during economic downturns since consumers must still purchase food despite cutting back on luxury items. It is one of the largest sectors globally, focusing on managing demand and competing effectively in logistics and supply chain management. A research report by Fortune Business Insights highlights the food processing market, valued at $2.3 trillion in 2021, projecting a growth rate of 10.6% annually, reaching an estimated $5.1 trillion by 2029. This strong growth is attributed to trends such as increased vegetarian diets, urban migration, rising online ordering, and higher disposable incomes for dining out.
Investing in the fast-food industry offers promising growth opportunities, but not all companies will outperform the market. McDonald’s Corporation and Domino’s Pizza, Inc. were highlighted as top performers in March 2023, with McDonald’s leading the QSR 50 Report for 2022 due to system-wide sales exceeding $112 billion and digital sales surpassing $18 billion. In early 2023, McDonald’s reported a nearly $20 billion sales growth, though Q4 2023 saw a slight dip with net revenues of $6.4 billion, below expectations. Despite this, sales at company-operated restaurants rose 12% year over year, thanks to the successful Accelerating the Arches strategy. Meanwhile, Domino’s is working to recover from two years of declining shares.
Our Methodology
We gathered stocks for our list based on the consensus of financial media on their strong fundamentals. We further narrowed down on the basis of a p/e ratio below 25, since the p/e ratio in subindustries of the food industry hovers above it, and then finally checked out their analysts’ upside based on their opinions of whether these stocks are trading at a discount and picked those which are according to analysts and ranked them on upside.
“Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).”
Arcos Dorados Holdings Inc. (NYSE:ARCO) is the largest McDonald’s franchisee in the world, operating exclusively in Latin America and the Caribbean. The company’s name, which translates to “Golden Arches” in English, reflects its core business of running McDonald’s restaurants across 20 countries in these regions. The company offers region-specific menu items, such as flan-like desserts in Peru, dulce de leche treats in Argentina and Uruguay, and McMolletes in Mexico.
A major catalyst for Arcos Dorados Holdings Inc. (NYSE:ARCO) is its ongoing digital transformation. In Q2 2024, digital sales grew by 24% in US dollars compared to the previous year. The company’s focus on digitalization has led to significant growth in digital channel sales, with increases between 25% and 50% in markets like Chile, Colombia, Ecuador, and Uruguay. The renewal of Arcos Dorados’ Master Franchise Agreement (MFA) with McDonald’s for another 20 years starting in 2025 presents a significant growth opportunity. Both companies recognize the substantial growth potential for the McDonald’s brand in Latin America, which could lead to further expansion and market penetration.
In Q2 2024, Arcos Dorados Holdings Inc. (NYSE:ARCO)’s revenue rose 15.2% year-over-year to $1.12 billion, driven by strong same-store sales in Brazil and the Caribbean, along with effective marketing and menu innovations. Profitability improved, with net income up 28.7% to $48.3 million, adjusted EBITDA increasing 22.1% to $112.6 million, and operating margin expanding by 80 basis points to 7.2%, due to enhanced operational efficiency and cost management.
As of Q2 2024, 19 hedge fund holders held stakes in the stock out of which the largest stakeholder was Moerus Capital Management with shares worth $18,683,865 as tracked by the Insider Monkey database. The stock holds a Moderate Buy rating based on 2 Wall Street Analysts. According to analysts, the average 12-month price target for Arcos Dorados Holdings is $13.50, with a high of $14.00 and a low of $13.00, reflecting a 38.75% increase from the current price of $9.73.
Overall, ARCO ranks 1st among the 7 cheap food stocks to buy according to analysts. While we acknowledge the potential of ARCO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ARCO but that trades at less than 5 times its earnings, check out our report about thecheapest AI stock.
