3 Reasons ARCO is Risky and 1 Stock to Buy Instead

August 25, 2025 at 00:02 AM EDT

ARCO Cover Image

Over the past six months, Arcos Dorados’s shares (currently trading at $7.11) have posted a disappointing 12.6% loss, well below the S&P 500’s 8.6% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Arcos Dorados, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Arcos Dorados Not Exciting?

Despite the more favorable entry price, we're swiping left on Arcos Dorados for now. Here are three reasons we avoid ARCO and a stock we'd rather own.

1. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

Arcos Dorados has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 13% gross margin over the last two years. That means Arcos Dorados paid its suppliers a lot of money ($87.03 for every $100 in revenue) to run its business. Arcos Dorados Trailing 12-Month Gross Margin

2. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Arcos Dorados’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 6.7% over the last two years. This profitability was mediocre for a restaurant business and caused by its suboptimal cost structureand low gross margin.

Arcos Dorados Trailing 12-Month Operating Margin (GAAP)

3. Breakeven Free Cash Flow Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Arcos Dorados broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Arcos Dorados Trailing 12-Month Free Cash Flow Margin

Final Judgment

Arcos Dorados isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at $7.11 per share (or a forward price-to-sales ratio of 0.3×). The market typically values companies like Arcos Dorados based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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