Cashing In on Brazil's World Cup and Olympics with Fast Food Restaurant Chains
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It has been speculated that the upcoming 2014 FIFA World Cup and 2016 Olympics in Brazil will create opportunities for investors across a range of companies operating in the consumer-goods sector. However, it is expected that the greatest sales growth will be for those companies operating in the fast food restaurant industry, with a boom in sales expected to drive higher levels of profitability.
While it is true that these events may not provide a sustainable boost to lift Brazil’s economy out of its new found doldrums, they will certainly boost sales for beverage, fast-food and convenience store chains, with international visitors, spectators, and athletes flooding the country. This will see the profitability of the major fast food chains operating in Brazil higher translating into higher share prices and an opportunity for investors seeking exposure to that industry.
How much growth will these events contribute?
It has been estimated that the 2014 FIFA World Cup will contribute $70 billion from both direct and indirect investments in Brazil, while the 2016 Olympics will contribute around $51 billion to the Brazilian economy. Investments of this size in Brazil will obviously stimulate an economy that has fallen afoul of falling demand for both its commodities and manufactured exports.
This, in conjunction with falling foreign investment, drove Brazil’s annual GDP growth rate down to 0.9% in 2012, compared to 2.7% in 2011 and 10.5% in 2010. But the outlook for 2013 and 2014 is somewhat better with 2013 GDP growth estimated at 2.8% and 2014 at 3.5%. Some of this can be attributed to the upcoming FIFA World Cup and Olympics and it certainly bodes well for increased consumer spending.
Key players in Brazil’s fast food industry
Those companies that stand to benefit most from these two events are those in the fast moving consumer goods sector and include brewers, fast food restaurant chains and convenience stores. Probably the most prominent among these companies for investors is Argentine company Arcos Dorados (NYSE: ARCO), which is the McDonald's Latin American master franchisee. Its key market is Brazil, where it has 735 or almost 38% of its total restaurants, which at the end of the first quarter 2013 contributed almost 48% of all sales.
Since listing as one of the hottest IPOs in 2011, its price has crashed by 60% from a post-IPO high of $29. But it's up for the year to date by just over 3%. Its significant share price decline has been driven by sluggish growth, rampant cost inflation, softening consumer sentiment in its key market (Brazil), and a rejuvenated competition fighting for market share.
These ongoing issues are reflected in the company’s first-quarter 2013 results, with revenue falling 6% year on year to $977 million, and net income plunging by 126% year over year, to a $6.6 million loss. The one bright spot in the company’s performance was a 9% increase in comparable sales year over year, on the back of changes in product mix and pricing to more appropriately match local conditions.
While the company’s outlook may not be the brightest at this time, the FIFA World Cup and Olympics could just be the catalyst required to boost sales and profitability in order to lift a flagging share price over the short-term.
Another fast food retailer and one causing much of Arcos Dorados’ headaches is Burger King World Wide (NYSE: BKW), which has made an aggressive entry into the Latin American market. At the end of the first quarter, the company’s number of restaurants in the region grew by 13% year over year, with Latin American sales making up 9% its total revenue of almost $328 million.
During this period, Burger King`s revenue fell by almost 43% year on year to $328 million, while net income surprisingly grew by a stunning 153% year over year to almost $36 million for the entire company. But even more impressively, over that 12-month period Burger King was able to convert 11% of its revenue into free cash flow. However, unlike Arcos Dorados, Burger King does not derive a significant a significant proportion of its revenue from Brazil. Therefore, it is unlikely that these events will drive a significant growth in its sales.
The other competitor having a significant impact on Arcos Dorados in Brazil, is domestically owned Brazil Fast Foods (OTC BB: BOBS), which has over 1,040 restaurants and other points of sale across Brazil. This has made it the second-largest hamburger chain in the country, and Arcos Dorados’ key competitor there.
It has also strengthened its position through a partnership arrangement with Yum! Brands, which allows it to operate 14 KFC stores as franchisee. Brazil Fast Foods also operates 22 Pizza Hut stores as part of its multi-brand strategy. The company reported some solid numbers for the first quarter of 2013, because despite revenue falling by 16% year on year to $29 million, net income surged ahead by 76% to $3.4 million.
Brazil Fast Foods is the most likely beneficiary from the FIFA World Cup and the Olympics, but investors should be aware that it does come with risks that don’t affect either Arcos Dorados or Burger King. The company is considering de-registering its U.S. OTC shares because of cost savings, and has no intention to raise funds in the U.S. In addition, as an OTC stock it is thinly traded leading to liquidity issues for investors.
Brazil Fast Foods is certainly a stand out performer in the Brazil fast food industry and more than likely will receive the greatest benefit from the FIFA World Cup and Olympics. But the risks around it de-registering its shares and liquidity issues certainly do not make it an appetizing investment except for the most risk tolerant investor. It is also clear Arcos Dorados is having problems performing, but both of those events will more than likely be solid short-term catalyst that will help to lift a flagging performance.
Matt Smith has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. The Motley Fool owns shares of Arcos Dorados. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!