Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Arcos Dorados the Perfect Stock?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Arcos Dorados (NYSE: ARCO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Arcos Dorados.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.1%* Fail
  1-Year Revenue Growth > 12% 11.8% Fail
Margins Gross Margin > 35% 15.8% Fail
  Net Margin > 15% 2.7% Fail
Balance Sheet Debt to Equity < 50% 100% Fail
  Current Ratio > 1.3 1.17 Fail
Opportunities Return on Equity > 15% 15.1% Pass
Valuation Normalized P/E < 20 28.48 Fail
Dividends Current Yield > 2% 1.8% Fail
  5-Year Dividend Growth > 10% NM NM
  Total Score   1 out of 9

Source: S&P Capital IQ. NM = not meaningful; Arcos Dorados started paying a dividend in June 2011. Total score = number of passes. *3 1/2-year growth rate.

With just one point, Arcos Dorados doesn't do very well on our scale. The newly public restaurant chain has gotten a lot of positive publicity, but its share price hasn't kept up, losing half its value over the past year.

Arcos Dorados combines a couple of potentially lucrative trends. It operates McDonald's (NYSE: MCD  ) franchises in Latin America, giving investors exposure both to the growth power that the McDonald's brand has generated around the world as well as to Latin America's particularly explosive rise of middle-class consumers. That has led to double-digit same-store sales rises, dwarfing even high-growth standouts Chipotle Mexican Grill (NYSE: CMG  ) and Panera Bread (Nasdaq: PNRA  ) , let alone the much lower industry average.

But even Arcos has its challenges. Weakness in the Brazilian currency has weakened growth in U.S. dollar terms there. More important, a rocky economy may lead to slowing expansion plans; Arcos planned to open 130 restaurants this year but only had 18 openings in the first half of 2012.

In its most recent quarter, Arcos fell a bit short of earnings estimates, but that wasn't particularly unusual given high raw-ingredient prices. Both Chipotle and Buffalo Wild Wings (Nasdaq: BWLD  ) similarly missed expectations.

For Arcos to get moving in the right direction, it needs to keep growing and find ways to boost its operational performance. Once Latin American growth returns to normal, Arcos will be in a good position to thrive.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Arcos Dorados may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Arcos Dorados to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Chipotle, Arcos Dorados, McDonald's, Panera Bread, and Buffalo Wild Wings. Motley Fool newsletter services have recommended buying shares of Panera Bread, Chipotle, McDonald's, and Buffalo Wild Wings, as well as writing covered calls on Buffalo Wild Wings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2006604, ~/Articles/ArticleHandler.aspx, 10/28/2016 8:49:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 18,169.68 -29.65 0.00%
S&P 500 2,133.04 -6.39 0.00%
NASD 5,215.97 -34.29 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:00 PM
ARCO $6.15 Down -0.10 +0.00%
Arcos Dorados CAPS Rating: *****
BWLD $143.20 Up +8.10 +0.00%
Buffalo Wild Wings CAPS Rating: *****
CMG $368.59 Up +0.57 +0.00%
Chipotle Mexican G… CAPS Rating: ****
MCD $112.08 Down -0.03 +0.00%
McDonald's CAPS Rating: ***
PNRA $189.42 Down -1.69 +0.00%
Panera Bread CAPS Rating: ****