Annual Review: Foreign Speculations

By Travis Johnson, Stock Gumshoe, January 21, 2014

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There are a few overseas stocks on our speculations list that I haven’t covered yet as we begin this new year, so let’s catch up on those:

Brazil Fast Food (BOBS) — Hold at $17. Next quarter may be bad so I’d look for opportunities to buy below $15.50, but 2014 growth could be very solid in the middle of the year.

BOBS operates the Bob’s burger chain in South America’s largest country, and also acts as a franchisee for Pizza Hut and KFC in Sao Paolo and has a few smaller brands in its stable, including the Chilean Doggis hot dog chain and a yogurt kiosk called Yoggis. Their big driver in recent years has been the success of their Pizza Hut and KFC outlets, but also the reorganization of the Bob’s brand — more franchisees, less emphasis on company-operated stores, and thus better margins. My argument since suggesting Bob’s in has been that inexpensive restaurants have the potential to do very well as Brazil’s middle class continues to grow, and that this little chain should be able to compete well because of an established brand and a local cost structure that lets them keep prices lower than competitors like Burger King or McDonald’s. That’s been true, for the most part, though the company has been through a lot of change in the four years since I suggested the stock — at the time it was trading at about 13X earnings. Since then, earnings are up about 3X in US$ terms and the stock has gone up about 300%. So what’s the deal now? Now it’s trading at about $17 and they have earned R$2.96 over the past four quarters, which translates to US$1.25 for a trailing PE of about … 13. So the shares aren’t at a premium compared to when we first covered them, they carry the same valuation. I expect that we’re going to have a bad fourth quarter number come through, relative to a year ago, because the quarter a year ago was spectacular, so that trailing PE is likely to look worse when they report the fourth quarter.

What we end up with is a company with about 1,000 locations in Brazil, more than half of them (and all the most important ones) in Southeast Brazil, where the impact of the Olympics (2016) ...

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