Macquarie Says Buy Fogo De Chao 'For U.S. Sizzle,' Sees Concerns In Brazil 'Overcooked'

In a report issued Thursday, Matthew Brooks issued an Outperform rating and $20 price target for Fogo De Chao, noting that the company offers a profitable model with plenty of room for growth and exposure to upscale U.S. consumers.

Fogo's Model For Success

The expert assured the firm believes “the strength of the U.S. domestic economy will support the U.S. rollout and lead to a near-doubling of their U.S. restaurant base over the next five years.”

The note continued to state that, in Macquarie’s view, the key to Fogo’s model’s success are the "gaucho" chefs who both cook and serve the meals. This helps the company reduce labor costs, which stand around 23 percent of sales – versus its peers’ average of 31 percent.

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So, while Fogo’s food costs are slightly higher, the difference of roughly 2 percent does not offset the difference in labor costs, thus leading to more profitable restaurants. “Couple this with the high sales per unit and fast maturation, and FOGO expects to deliver cash-on-cash returns of around 40 percent,” Brooks assured.

“This is nearly one-third higher than other upscale/casual dining peers at 29 percent.” Driven by the U.S. rollout, the firm estimated Fogo could retrieve an EPS CAGR to 2020 of 21 percent per year.

However, there’s a second part to the Fogo growth story: “Comp sales growth, and two key drivers here are large group sales and Sunday lunch,” the expert explained.

Brazil, IPO And Lock-Up Concerns Create Buying Opportunity

Macquarie then went on to look into valuation. In the analyst's view, Fogo’s stock is cheap mainly due to the sluggishness in the Brazilian economy and poor sales in the country.

The analyst went on to explicate, “FOGO has also underperformed with other recent IPOs, as signaled by the 7 percent underperformance of the Renaissance Capital IPO ETF vs the Russell 2000. Lastly, there is the overhang of the 80 percent of FOGO still owned by THL, as the 180-day lock-up expires in mid-December 2015.

“But with above-average profitability, a 21 percent EPS CAGR to 2020e driven by US network expansion and at a 28 percent discount to the U.S. restaurant sector,” the firm sees the stock as a good buying opportunity.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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