Why Arcos Dorados Holdings Inc. Stock Lost 19% Last Month

Shares of the Latin American McDonald's chain fell on a disappointing earnings report.

Jeremy Bowman
Jeremy Bowman
Jun 13, 2018 at 3:28PM
Consumer Goods

What happened

Shares of Arcos Dorados Holdings Inc. (NYSE:ARCO) took a dive last month after the Latin American McDonald's (NYSE:MCD) franchisee reported disappointing first-quarter earnings. According to data from S&P Global Market Intelligence, the stock finished down 19%.

A McDonald's restaurant

Image source: McDonald's.

So what

Arcos Dorados, which is McDonald's largest franchisee, had its worst day of the month on May 8, as the stock fell 7% in anticipation of its first-quarter earnings report. The company said that revenue increased 5.5% in the quarter, or 10.7% on a currency neutral basis, to $802.8 million, excluding Venezuela. Comparable sales in the period increased 9.8%, but much of that was driven by inflationary pressure in parts of the region.

On the bottom line, earnings per share fell from $0.19 a year ago to $0.06, which missed estimates of $0.08, though that was mostly due to a change in other operating income that excludes core operations.

CEO Sergio Alonso said:

Our strategy of leveraging McDonald's core assets to expand volumes, reinvesting in our restaurants and enhancing operational excellence drove improved customer satisfaction together with topline growth. We solidified our capital structure with the completion of our tender offer and issuance of our 2027 Notes. This, along with the operational efficiencies we have built into our system, positions us to capitalize on improvements in our markets as we transition from a turnaround mindset to a growth strategy.

Later in the month, the company announced a $60 million stock repurchase program.

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Now what

Considering that economies like Brazil's -- where half of Arcos' restaurants are -- are gradually improving, the stock should be a winner from a macroeconomic standpoint. McDonald's itself has been strong around the world, as many of the improvements made under CEO Steve Easterbrook are paying off.

The stock touched a 52-week low last month and is trading at a price-to-earnings ratio of 17.5, significantly cheaper than McDonald's. Considering the potential growth ahead, last month's sell-off may present an appealing buying opportunity.