Why Arcos Dorados Stock Got Socked Today
Key Points
Many market players weren't expecting the left-leaning Luiz Inácio Lula da Silva to win in the final round.
That's one reason the country's currency was hit hard, as were the stocks of its major companies.
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The surprise victory of leftist Luiz Inácio Lula da Silva in Brazil's runoff presidential election was affecting the country's stocks on Monday... and not in a positive way. Fears of loose fiscal discipline and a challenging business climate led to a sharp decline in the country's currency, the real, against the dollar, and to a sell-off in many Brazilian equities.
Arcos Dorados (NYSE:ARCO), the world's largest franchisee of McDonald's (NYSE:MCD) restaurants, is based in Uruguay, not Brazil, though the latter is its most significant single market by far. Given that, it's little wonder that its stock was caught in the broader sell-off. This was compounded by a major U.S. bank's recommendation downgrade. At Monday's close, Arcos Dorados stock was down by nearly 13%.
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Feeling blue about Brazil
That downgrade came from Bank of America (NYSE:BAC) Securities analyst Robert Ford Aguilar. He pushed his Arcos Dorados rating down one full peg to neutral from his previous buy. He also significantly cut his price target, lowering it to $9 per share from $12.
Mirroring broader investor sentiment toward Brazilian and Brazil-related stocks, Aguilar cited a macroeconomy that might come under strain from Lula's policies.
According to reports, the analyst mused that the country's sovereign debt could be downgraded by credit rating agencies. Additionally, the real might continue to depreciate.
Tarnished gold
As with many companies active in Latin America, Brazil matters to Arcos Dorados. It is by far the largest country in the region, both in terms of size and population, and, as such, is a huge market for many products and services. In its latest reported quarter, Arcos Dorados derived almost 40% of its revenue from Brazil.
Given that, investors are right to be concerned about the nation's future. Yet that market reaction feels overdone to me, especially considering that Lula has served for years as president -- and Arcos Dorados did quite well in Brazil at times during those periods. It also holds significant pricing power thanks to the enduring popularity of McDonald's. I'd take this as a buying opportunity in the suddenly beaten-down stock.
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Bank of America is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.
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