Is Arcos Dorados No Longer Golden?

Wall Street can't generate enthusiasm for Brazilian restaurateur Arcos Dorados (NYSE: ARCO  ) , so why do our Motley Fool CAPS members disagree? Over 500 members of the investment community have weighed in on its prospects, and 98% of them see it outperforming the broad market averages, bestowing on it the highest five-star rating. In contrast, one-third of the analysts rating it believe it will stumble.

So who has it right? The professional class of analysts sitting in their paneled offices smoking stogies, or a motley community of investors pooling their best thoughts for others to share? We think we know who'll come out ahead. How about you?

Arcos Dorados Snapshot

Market Cap $2.8 billion
Revenues, TTM $3.8 billion
1-Yr. Stock Return (50.4%)
Return on Investment 7.6%
Est. 5-Yr. EPS Growth 24.3%
Dividend & Yield $0.24/1.8%
Recent Price $13.25
CAPS Rating (out of 5) *****

Source: FinViz.com. TTM = trailing 12 months.

Of course, as much as we love our CAPS community, don't buy a company just because it's garnered top ratings. And don't sell it just because Wall Street says to either. Investing requires closer diligence on your part, so use a stock's CAPS rating as a launching pad for your own research.

Ariba, ariba!
With Europe falling apart financially, it's really the last place you want exposure to at the moment. With even Switzerland, one of the stalwarts of the Continent, now grinding to a halt economically (analysts are forecasting contraction in the third quarter) it looks like the worst is yet to come.

And that just happens to be one of the investment theses behind the Latin American McDonald's (NYSE: MCD  ) franchisee and probably helps to explain in large part why analysts see Arcos Dorados' earnings growing at a 24% clip over the next five years while its former parent expands at a less than 10% clip. McDonald's receives 40% of its revenues from Europe while Arcos Dorados has zero exposure. Not that Latin America is immune from what's going on in the rest of the world, and Brazil -- its largest segment -- has issues of its own, but analysts are still expecting growth of between 3% and 4% for the region this year.

Flipping burgers
Both Wendy's (NYSE: WEN  ) and Burger King Worldwide have a presence in Latin America, but derive less than 10% and 6% of their revenues from there, respectively. While Yum! Brands (NYSE: YUM  ) exited the market in 2010, no other national restaurant chain has ventured south of the border: Brinker International (NYSE: EAT  ) , Darden Restaurants, and DineEquity have all forsaken the region.

With Arcos Dorados being the dominant industry force, its fastest-growing region is its southern Latin American division, comprising Argentina, Chile, Colombia, Ecuador, Peru, Uruguay, and Venezuela. Revenues grew 45% last quarter compared to 40% growth in the northern division and a 6% increase in Brazil.

Admittedly, the economy of its home country, Argentina, has essentially ground to a halt because of President Kirchner's expropriation of Spanish oil giant YPF's assets. Still, the rest of the key countries are doing fairly well. Colombia just surpassed Argentina to become the second-largest economy in South America and the third-largest in Latin America behind Brazil and Mexico, and Venezuela is currently enjoying a spending spree by its strongman leader Hugo Chavez as he campaigns for reelection (though it's hardly sustainable).

Build up, build out
I've noted previously that Arcos Dorados is being weighed down by its contractual requirements to build out the chain. As part of its master franchise agreement with McDonald's, Arcos is required to invest at least $180 between 2011 and 2013 to open at least 250 restaurants. It's also going to spend as much as $250 million more on an additional 100 stores that it agreed to open as part of having raised $400 million reals last year. As I pointed out, that speaks of extensive demand, not a picture of contraction.

Yet it's causing it to burn through cash now and skewing the picture, but at 17 times earnings estimates it's not overly expensive, particularly when compared to its growth estimates. As CAPS member jspendmd1 suggests, it's like buying into McDonald's alongside Ray Kroc. "This is the beginning of the second best food franchiser ever. With the input of McD, and the whole of South America at its fingertips, you must get in now."

I agree Arcos Dorados is a bargain at these prices, but tell me in the comments box below if you agree the Latin American golden arches are being unfairly tarnished.

What's wrong with that?
Of course, Arcos Dorados isn't the only south-of-the-border growth story. The Motley Fool has identified one top stock that could be considered the "Costco of Latin America" and you can get full access to the free report by downloading your copy today! But hurry, because it's available only for a limited time.

Fool contributor Rich Duprey owns shares of Arcos Dorados Holding, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Darden Restaurants, Arcos Dorados Holding, and McDonald's. Motley Fool newsletter services have recommended buying shares of McDonald's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On September 05, 2012, at 5:13 PM, okiedivot wrote:

    Not that sure about management perks and accounting practices. What I've read isn't pretty, but don't know the quality of bloggers info - most of the time.

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