Arcos Dorados: Big Macs and Brazil

11/12/2013 10:00 am EST

Focus: STOCKS

One global stock on our recommended list—the franchise owner of McDonald's restaurants in Latin America—got a boost after JP Morgan upgraded the stock, notes Geoffrey Seiler in BullMarket.com.

Analyst John Ivankoe took Arcos Dorados (ARCO) from neutral to overweight and increased his target from $13 to $14. It is the first time the analyst has had a positive view on the stock since it IPO'd.

"Over the past few years, Arcos Dorados has gone from one of most active names, in terms of client interest, to one of the least. Over the past two years, the stock is a significant underperformer, down 49%.”

Arcos Dorados hasn't been a good stock to own since it IPO'd back in 2011, but we recently added the stock to the Recommended List due to what looks like improving operational results and an attractive valuation.

We also like that the Brazilian government is stepping up to stem the slide in its currency; in addition, we see a clear catalyst in the form of the 2014 World Cup coming to Arco's largest market of Brazil.

For Q3, currency was likely still an issue, as it spiked in August, but it has come back down and stabilized since the Brazilian central bank stepped in to sell currency swaps in order to support the real.

Comps for Q3 should be strong, but what gets us most excited about this beaten-down stock is the World Cup next year in Brazil. McDonald's is an official sponsor of the tournament, which is going to bring a lot of advertising support leading up to and into the games.

In addition, the country will see a large influx of tourists, many of whom will be looking for a familiar place to gather and eat.

This bodes well for Arcos Dorados, and given that the Olympics will be in Brazil two years later, it should have a nice tailwind to look forward to in the coming years.

At this point, we think investors should start to get more interested in the name, as the World Cup catalyst starts to come into view. We rate the stock a Buy with a $15 target.

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