Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of the largest McDonald's (NYSE: MCD ) franchisee in Latin America, Arcos Dorados (NYSE: ARCO ) , plunged as much as 22% this morning following the company's first-quarter earnings report.
So what: For the quarter, Arcos Dorados extended a string of strong growth by reporting an 11.5% increase in sales with comparable restaurant sales up 11.6%. The company also noted that it opened 86 stores over the trailing-12-month period. The real news sending the stock lower is the 28.5% drop in net income to $25.4 million from $35.5 million. Arcos Dorados blamed lower operating results, higher foreign exchange losses, and higher tax charges as the primary reasons for the profit decline.
Now what: Without question -- to me, at least -- today's results look like a brutal overreaction by investors. The Golden Arches are an easily recognizable brand, and Arcos can do very little to control foreign currency trading. What the company can work on is controlling its expenses and continuing to grow at a double-digit pace. The other investable possibilities in this sector are: Wendy's, a company that has only been able to turn a marginal profit occasionally over the past few years; Jack in the Box, a considerably smaller company with comparable store growth that's only one-third of Arcos Dorados; and Yum! Brands, owner and operator of KFC, Pizza Hut, and Taco Bell, whose valuation is now much higher than Arcos Dorados. It's easy to see why Arcos Dorados shoots to the top of my list. I'll be taking a serious look at adding this to my personal portfolio after today's move lower.
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