Is the Latin American McDonald’s Bueno o Malo?

By Ryan Guenette - August 28, 2012 | Tickers: ARCO, BKW, JACK, MCD, YUM | 0 Comments

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Arcos Dorados Holdings Incorporated (NYSE: ARCO) is known as the “Latin American McDonald’s.” Arcos Dorados is the largest operator of McDonald’s restaurants in Latin America. As of December 31^st 2010, the company operated or franchised 1,755 McDonald’s restaurants, which at the time represented 6.7% of McDonald’s total franchised restaurants. Arcos Dorados possesses restaurants in 19 countries, and is Argentinian based. On April 18^th, Arcos priced well above its initial range of $13.00 to $15.00, and finished the day near the $20.00 mark. After threatening to break $30.00 a share, Arcos Dorados began a sharp downward move. Now as the opening bell rings on August 21^st, 2012, Arcos trades within its previously predicted initial public offering price at $13.96. So is this Latin American McDonald’s bueno o malo?

Fuerte Fundamentals

In 2011, Arcos Dorados reported earnings per share of $0.54. In 2014, the average analyst consensus believes the company will derive $0.98 from its business operations. This represents an increase of 81.48%, a tremendous feat for any company. Based on these statistics, the company’s compound annual growth rate (CAGR) is 21.98%, which is well superior to McDonald’s compound annual growth rate for this time period, 7.74%. However these statistics are only projections, as Arcos has not reported earnings for years prior to 2011. The original McDonald’s has years upon years of proven financial resolve, and is much more predictable due to its size.

Additionally, currently Arcos Dorados pays out an annual dividend of $0.24, which at the current price puts the company’s dividend as yielding 1.71%. Financial reports released by analysts show no noticeable growth is expected in Arcos Dorados’ dividend in the coming years, yet much it unknown, as the company has no previous track record of raising or lowering dividend payouts. McDonald’s currently pays out an annual dividend that yields 3.16% at current prices, with a long track record of raising dividends consistently. From this we can see the estimated strength of Arcos Dorados financial picture, as well as its decent dividend that is trampled by McDonald’s.

The chart below displays Arcos Dorados’ sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

The Way to Own McDonald’s with No Exposure to Europe

The European Union is falling into a recession. The International Monetary Fund is desperately attempting to keep the continent’s currency alive. The spotlight is now not only shining on Greece, but also Spain, Portugal, and Italy. Several countries are on the brink of default. The unemployment rate among the citizens of these countries is staggering and shocking. So it is of no surprise that the consumers of Europe are spending less. McDonald’s has a huge exposure to Europe, as nearly 30% of its revenue was derived from sales within Europe. However while the recession in Europe will hurt sales, it may promote their brand for its value items, such as those on the dollar menu. While the recession in Europe will hurt McDonald’s, it may not hurt the company as much as it would a luxury brand, such as Tiffany’s. However to steer clear of the European disaster, yet still own the iconic golden arches brand, Arcos Dorados focuses on the Latin American market. As the chart below displays, Arcos Dorados operates in regions that possess superior GDP per capita growth, giving people more money to spend on food, as well as a larger market of youthful citizens, Arcos Dorados target audience.

Additionally, Latin America’s fast food industry is growing at a pace well superior to North America’s fast food industry, McDonald’s main market.

The reality of the matter is that Arcos Dorados operates in a faster growing region than McDonald’s, and thus should experience quicker-paced growth than McDonald’s.

Who is The King of the Burger?

Compared to some of Arcos Dorados’ most prominent competitors, such as: McDonald’s Corporation (NYSE: MCD), Burger King Worldwide Incorporated (NYSE: BKW), Yum! Brands Incorporated (NYSE: YUM), and Jack in the Box Incorporated (NASDAQ: JACK), Arcos Dorados compares relatively in-line.

In terms of growth, Yum Brands leads the industry, while Jack in the Box is the laggard. Arcos Dorados, McDonald’s, and Yum! all pay out decent sized dividends, with McDonald’s possessing the largest dividend, and Yum possessing the fastest growing dividend. In the fundamental ratio comparison, Burger King appears to be trading at a hefty premium, while McDonald’s appears to be trading at a bargain. When growth is taken into account, Arcos appears to be trading at a premium, while McDonald’s appears to be a little pricey. In the net profit margin comparison, Arcos Dorados stands out to the downside, while Yum Brands stands out to the upside.

The Foolish Bottom Line

Arcos Dorados has been one large blunder since going public, but is finally within its previously projected trading range. This Latin American McDonald’s has strong fundamentals, but has not proved itself. Its decent dividend is a little icing on the cake, but meager compared to McDonald’s dividend, which it has consistently grown over the years. Arcos Dorados main advantage over McDonald’s is its region of operation. Latin America is a fast growing region with more of its population in the target age group for Arcos Dorados. Despite McDonald’s exposure to Europe and other stagnant economies, I believe it is still the king of fast food. Arcos Dorados may offer substantial value to its shareholders in the future, but I feel safer in the original golden arches.   

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