McDonald’s Latin American Golden Opportunity

By Matthew Luke - August 5, 2012 | Tickers: ARCO, BKW, MCD, WEN, YUM | 0 Comments

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Arcos Dorados (NYSE: ARCO) will announce its second quarter 2012 earnings results next week before the opening bell on August 7th. The analyst consensus earnings estimate is $0.07 per share, with a consensus revenue estimate of $914.9 million USD.

Spanish for “Golden Arches,” Arcos Dorados is commonly referred to as the McDonald’s (NYSE: MCD) of Latin America. After purchasing McDonald’s Latin American operations in 2007, Arcos Dorados became the exclusive McDonald’s franchisee of South America, Central America and the Caribbean. Arcos Dorados 1,840 company operated restaurants represent about 7% of McDonald’s total worldwide restaurants. This makes Arcos Dorados the single-largest franchiser of McDonald’s restaurants in the world (in terms of both system-wide sales and total restaurants).

While Arcos Dorados obviously derives all of its revenue from Latin American, McDonald’s total percentage of revenues from Latin America is rather small. Instead, McDonald’s receives 40% of its revenue from Europe, 32% from the United States and 22% from Asia/Pacific, Middle East and Africa (the remaining 6% comprising of other countries, including Latin America). Weakening sales in Europe are a drag on McDonald’s earnings, as well as slowing growth from the United States. The major areas of future growth for McDonalds’s will be from the emerging markets, particularly China and Latin America. So why not avoid all of that European non-growth and US slowing growth? Why not just skip the middle-man and target that emerging market growth directly?

Why not, indeed. After all, Arcos Dorados has a tremendous growth story ahead of it. The United States has a population of about 312 million people and 14,098 US McDonald’s restaurants. That equates to one McDonald’s restaurants for every 22,130 Americans. In the 20 Latin American countries Arcos Dorados operates in, there is a combined population of about 580 million people and only 1,840 McDonald’s restaurants. That works out to an amazingly low one McDonald’s restaurant for about every 315,217 people in Latin America. Needless to say, that is an outstanding amount of upside potential.

And let us for not forget about Arcos Dorados’ dividend policy. Though dividend payments from US-Based high-growth companies are few and far in between, foreign-based companies tend to be more shareholder-friendly in this regard. While the management of US-based high-growth companies often spends shareholder money on stock buybacks or something that could be equally as wasteful and rubbish as that, Arcos Dorados’ management instead decides to reward shareholders with an annual dividend yield of currently 1.83%. While 1.83% is by no means a massive yield, you are getting the potential for massive growth to go alone with it. That seems like a perfectly fair compromise to have.

When it comes to competition from Yum! Brands (NYSE: YUM), the other major global restaurants company, McDonald’s and Arcos Dorados are the hands-down leader in Latin America. While McDonald’s has made Latin America one of their primary focuses for growth, Yum! Brands has focused the vast majority of its attention on emerging market growth from China. So much focus on China that Yum! Brands has little presence in Latin America. This gives McDonald’s and Arcos Dorados the clear-cut first-mover advantage.

The first-mover advantage is crucial in establishing that all important customer brand loyalty. Never underestimate customer brand loyalty. It is possibly the most important non-quantifiable metric to consider. Once you establish brand loyalty, it becomes extremely difficult for another company to come into the market and take that loyalty away. Just ask Burger King and Wendy’s, the perpetual number two and number three burger joints. Forever playing second fiddle to McDonald’s and its incredible brand loyalty. Always the bridesmaid, never the bride.

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