ARCO

We rate Arcos Dorados Holdings Inc. (ARCO) as a Buy with a composite score of 72.9/100 at a current price of $8.75. The stock scores above average across the majority of our six quantitative factors and ranks #37 out of 7,333 stocks in our universe, reflecting a favorable risk-reward profile.

The rating is primarily driven by strength in value (89th percentile) and quality (85th percentile), which together account for the majority of the composite score. All factors score above the 40th percentile, indicating no material weakness in the quantitative profile. We assign a Narrow Moat rating (59/100), Medium uncertainty, and Standard capital allocation.

Key items to watch: whether strong momentum is fundamentally supported by revenue trends; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

Arcos Dorados Holdings Inc. holds a top-quartile position (#1 of 50) within the Retail Trade sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 72.9/100 places it at rank #37 in our full 7,333-stock universe. At $1.5B in market capitalization, Arcos Dorados Holdings Inc. is a small-cap player in the Retail Trade space, which limits certain scale advantages but may allow for more agile strategic execution.

The outlook is moderately positive, with revenue expanding at 3% and favorable momentum (65th percentile) reflecting constructive market sentiment. The business shows steady execution, though the growth rate is below the levels typically associated with high-conviction growth stories. Momentum confirmation provides support for the current price level.

The margin cascade tells an important story: gross margins of 47% (+10.6pp vs sector) narrow to operating margins of 7% (+3.3pp vs sector) and net margins of 3.3%, yielding a gross-to-net conversion rate of 7%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $8.75, Arcos Dorados Holdings Inc. appears undervalued relative to its fundamentals. Our value factor score of 89/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. The stock screens as attractively priced on a majority of these measures, suggesting the market may be underappreciating the underlying fundamentals.

The stock currently trades at a P/E of 12.3x (a 43% discount to the sector median of 21.4x), EV/EBITDA of 1.3x (discounted to peers), P/B of 3.7x, P/S of 0.1x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a Medium uncertainty rating to Arcos Dorados Holdings Inc.. The stock presents a balanced risk profile: significant leverage (153% debt-to-equity) and the combination of leverage (153% D/E) and thin margins (3.3% net) amplifies downside risk. While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: significant leverage (153% debt-to-equity); the combination of leverage (153% D/E) and thin margins (3.3% net) amplifies downside risk. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 74th percentile and quality factor at the 85th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 47% provide a buffer against cost pressures; above-average stability (74th percentile) suggests predictable business dynamics; a 3.41% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile is favorable for long-term investors.

We rate Arcos Dorados Holdings Inc.'s capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 117.6%, and the balance sheet is managed within acceptable parameters (D/E: 153%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; Arcos Dorados Holdings Inc. falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 3.41% dividend yield provides some income return, but the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, Arcos Dorados Holdings Inc. receives a Buy rating with a composite score of 72.9/100 (rank #37 of 7,333). Our quantitative framework assigns a Narrow Moat (59/100, trend: stable), Medium uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 72/100.

Our analysis supports a constructive view on Arcos Dorados Holdings Inc.. The combination of identifiable competitive advantages, medium uncertainty, and standard capital allocation creates a risk-reward profile that favors accumulation at current levels. We recommend investors consider adding this name to portfolios aligned with the stock's risk profile.