Arcos Dorados Holding Inc. (ARCO): Gold in Those Golden Arches says Bank of America

Normally, we look for stocks that trade at least 1 million shares a day; however, when a major broker says a company has upside potential of close to 40%, we'll make an exception. And that's what Bank of America/Merrill Lynch says to expect from Arcos Dorados Holding Inc. (NYSE:ARCO).

Arcos Dorados is an Argentina-based company and is the largest operator of McDonald's Corporation (NYSE:MCD) restaurants in Latin America and the Caribbean. Arcos operates or franchises more than 2,050 McDonald's-branded restaurants serving approximately 4.3 million customers in 20 countries and territories (Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, St. Croix, St. Thomas, Trinidad & Tobago, Uruguay and Venezuela).

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Analyst, Robert E. Ford Aguilar believes those golden arches could turn into gold for investors. He puts a price-target of $14 on the stock (37.4% upside to target as we type) while upgrading his opinion to "Buy" from "Underperform."

Aguilar wrote, "We reflect the adoption of SICAD II [floating rate of approximately 50 bolivars per U.S. dollar] in Venezuela for '14, and a portion of incremental efficiency improvements we believe ARCO capable of in '15. Recent modification of Venezuelan rent law could enable more equitable economic adjustments with ARCO franchisees."

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In the past 52-week, ARCO shares hit a high of $14.35 and a low of $8.26, which makes $14 look possible.

Making it to $14, again, also looks possible when examining ARCO's recent price-to-sales (P/S) history and projected revenue. Since 2009, Wall Street has been willing to pay from 0.43 to 1.96 times Arcos Dorados' sales. On average, the McDonald's franchise traded at 0.92 times sales during the last half-decade. Today, the company trades with a P/S ratio of 0.54, much closer to the bottom than the top.

Analysts forecast revenue of $3.95 billion for 2014 and $3.94 billion for next year. Since they are both about the same, we'll work off of the 2015 consensus since it is the lower of the two.

To get to $14 based on 2015's revenue consensus would require a P/S ratio of 0.75, which is below the five-year average, but higher than ARCO has been valued for the most part since November 2012.

Overall: Arcos Dorados Holding Inc. (NYSE:ARCO) will likely need to show financial sheet improvements, not just talk of it for shares to have a shot at $14. The status quo, as sales estimates suggest, might not be enough for Wall Street to expand ARCO P/S valuation.