Investing in McDonald's without Investing in Europe
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The market was hit hard on Monday, falling on worries coming out of Europe. What a shocker. Leading the way down was McDonald’s (NYSE: MCD), the Dow’s biggest loser (down as much as 3.63% intraday). McDonald’s reported earnings of $1.35 billion -- down from Q2 last year and missing analyst expectations for this year's second quarter. Common phrases used to describe the earnings miss included “foreign currency volatility," “rising commodity costs,” and “European uncertainty.”
Over the short-term, fluctuations in the currency exchange will always be a potential risk for any multinational company. Likewise for commodity inflation for any restaurant. These are just the costs of doing business. For McDonald’s investors, these short-term issues will balance out over a longer period. Investors thinking in terms of years rather than quarter-to-quarter can use the perceived weakness to buy shares of a great American company at a discount. Or they could, if not for the third phrase I mentioned earlier: European uncertainty.
The old cliché says that the only things guaranteed in life are death and taxes. Well, maybe it is about time to add European uncertainty to that list. With no end in sight to the problems in Europe, investors of multinational companies will just have to accept European risk as another cost of doing business. For McDonald’s investors however, that cost is higher than many other US multinational companies. For you see, McDonald’s does 40% of their business in Europe (a greater percentage than even that of their US operations). For McDonald’s, problems specific to Europe hit the company much harder than other companies. If you want to invest in a great brand like McDonald’s though, that is just the reality you will have to accept. You have to take the bad with the good. Take the European with the rest of the world. Unfortunately, there is no way to invest in McDonald’s without having to also invest in Europe.
Huh? What’s that, inner-voice? There is a way? Well, alright then. Do tell.
Enter the McDonald’s of Latin America: Arcos Dorados (NYSE: ARCO). After purchasing McDonald’s Latin American operations in 2007, Arcos Dorados became the exclusive McDonald’s franchiser of South America, Central America and the Caribbean. Arcos Dorados is the single-largest McDonald’s franchiser in the world. The company represents 7% of McDonald’s total worldwide restaurants.
Operating in Latin America, there are many factors that make Arcos Dorados an interesting investment opportunity. One factor is the emerging Latin American middle-class. An emerging middle-class earning increasingly higher wages. One thing that is universal among people emerging from poverty is that with higher wages comes a higher amount of disposable income. Disposable income to spend on the nonessential discretionary items that make life so enjoyable. Items like tasty burgers and cold milk shakes on a hot Brazilian summer’s day.
Additionally, the population in the areas Arcos Dorados operates in is another factor that makes this company so promising. Arcos Dorados Latin American operations include 20 countries with a total population of over 500 million people. These 500 million people are served by a total of 1,840 McDonald’s restaurants. Let us contrast that with McDonald’s US-only operations. In the United States, there are over 300 million people served by 14,098 McDonald’s restaurants. That works out to 1 McDonald’s restaurant for every 21,279 people in the United States. For Latin America however, that is an outstandingly low 1 restaurant for every 271,739 people. The potential growth for McDonald’s in Latin America is simply tremendous.
Investing in Latin American is not without its own currency and political risks however. It is important for investors to understand those risks before jumping headfirst into an investment like Arcos Dorados. With that said, I personally believe that the potential outweighs any risks. Investing in Arcos Dorados gives you something that investing directly in McDonald’s cannot. That something is pinpointing the explosive growth opportunity of the emerging Latin American middle-class. And all without having to deal with the endless problems out of Europe.
Not having to deal with Europe? Where do I sign up?
WhichStocksWork owns shares of Arcos Dorados. The Motley Fool owns shares of Arcos Dorados and McDonald's. Motley Fool newsletter services recommend Arcos Dorados and McDonald's. 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. If you have questions about this post or the Fool’s blog network, click here for information.