Why Arcos Dorados Shares Plunged

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.

Craving more input? Start by adding Arcos Dorados to your free and personalized watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Arcos Dorados. Motley Fool newsletter services have recommended buying shares of Arcos Dorados, McDonald's, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (3) | Recommend This Article (10)

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  • Report this Comment On May 05, 2012, at 3:52 AM, Learn2compound wrote:

    I agree with you on ARCO. Sellers are obviously overreacting. This is a great opportunity to buy a huge growth story at a bargain price! and so I did.

  • Report this Comment On May 05, 2012, at 7:22 AM, bourse wrote:

    ...add fear of nationalization of private companies in Argentina where Arcos Dorados is headquartered. But their diversified corporate structure over many countries should protect them rather well.

    For me too ARCO is a buy with a substantial margin of safety!

  • Report this Comment On May 05, 2012, at 10:14 AM, fredricjl wrote:

    South America has become a dangerous place to invest given the growth in confiscatory politicians. I think MCD only franchises there and probably for good reason. If there is profitable growth there then I will go with MCD and get it through the fees generated.

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