Arcos Dorados: Past Problems and Future Potential

It had all seemed so simple. Arcos Dorados (NYSE: ARCO  ) : the McDonald's (NYSE: MCD  ) of Latin America. You take the world's most successful restaurant concept and bring it to a region with an emerging middle class of young consumers itching to spend their new disposable income on all manner of discretionary purchases. What is not to love about that scenario? It seems like a guaranteed recipe for success, so what could possible go wrong?!

I'm NOT Lovin' It
Apparently, a lot can go wrong. As the exclusive McDonald's restaurant franchiser in 20 countries and territories which encompass 580 million people, there is much potential for this company. But as the old saying goes, "Potential means you ain't done it yet!" In a year when the S&P 500 has rallied more than 20%, shares of Arcos Dorados are basically flat. Over the past 52 weeks, shares are down about 22%. Worse still, since its IPO in April 2011, shares have lost about 44% of their value. That is a lot of "potential" alright.

Accept The Things We Cannot Change
Many of the problems with an investment in the McDonald's of Latin America are not the fault of Arcos Dorados' management team or the McDonald's Corporation, but with the region itself; these issues affect everyone. In particular, the largest of these issues recently has been that of currency devaluation.

Take Arcos Dorados' largest market, Brazil, as a good example; it is home to 37% of the company's nearly 2,000 full-service McDonald's locations. Since the Brazilian Real's mid-2011 highs, the currency has fallen 30% against the U.S. dollar. During Arcos Dorados' most recent quarter, the company's Brazilian division grew organic revenues by 15.6%. That's great! Because the company reports its earnings in U.S. dollars, however, the reported revenue from Brazil was only up 9.4%. That's... less great.

A similar situation can be found throughout many Latin American countries. The Venezuelan Bolívar is down 31.75% year-to-date against the dollar (ordered so overnight by that country's former president.) The Argentine peso is also down to the tune of 15%, and the Colombian Peso is down 7.25%. The simple fact is that many of the currencies in Latin America are worth significantly less than it was a year or so ago (which is a sizable problem for multinational companies like Arcos Dorados.)

Giving the Company a Sporting Chance
Although regional issues in the recent past have affected the company's earnings and share price, some regional catalysts in the near future could bring some of that Latin American potential back to the stock. Beginning in just nine months is the 2014 FIFA World Cup, which will be followed two years later by the 2016 Summer Olympic Games. Both of these events will be hosted by Arcos Dorados' largest revenue contributor, Brazil.

These two global events will see major corporate sponsorship from McDonald's as the "exclusive retail food operator" of the World Cup and the "exclusive meal brand" of the Olympic Games. In addition to being the only branded food allowed to be sold at the various World Cup and Olympic venue locations, McDonald's will also be busy rolling out massive TV, radio, and Internet advertising campaigns. The company will increase its social media presence and have nationwide restaurant promotions as well.

Essentially, the McDonald's logo will be featured anywhere and everywhere in Brazil. More than just being a short term financial pop, these events present McDonald's and Arcos Dorados with an amazing opportunity to increase brand exposure in Brazil and elsewhere in Latin America well after these spectacles are a distant memory.

Foolish Bottom Line
With shares of Arcos Dorados down such a large amount since going public, it is clear that the company has yet to live up to its immense potential. Much more speculative of an investment than McDonald's itself, Arcos Dorados is certainly not appropriate for risk-adverse investors. For those able to get comfortable with the idea of political and currency uncertainty throughout Latin America, however, the upside potential at these levels could very well justify taking on that added risk.

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