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Why Arcos Dorados Stock Gained 14% Last Month

By Jeremy Bowman - Dec 4, 2018 at 7:22PM

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Shares of the Latin American McDonald's franchisee gained on a strong earnings report.

What happened

Shares of Arcos Dorados (ARCO 1.61%), the world's largest McDonald's franchisee, jumped 14% in November, according to data from S&P Global Market Intelligence. The operator of McDonald's (MCD 1.67%) restaurants in Latin America benefited from a better-than-expected third-quarter earnings report in the middle of the month and a key upgrade to McDonald's that seems to bode well for Arcos Dorados.

The following chart shows the stock's trajectory, with its two distinct gains in the month.

ARCO Chart

ARCO data by YCharts

So what 

Arcos Dorados shares jumped 6.2% on its third-quarter earnings report on Nov. 14, as the fast-food chain said revenue increased 8.3% on a constant-currency basis and comparable sales were up 7.4%, with guest traffic up in Mexico and its southern Latin America division. Adjusted earnings per share, excluding Venezuela, increased from $0.12 to $0.20, which easily beat estimates at $0.09, a sign that increasing comparable sales are converting into bottom-line gains. In constant currency, net income more than doubled in the period.

The exterior of a McDonald's restaurant

Image source: McDonald's.

"With the uncertainty about Mexico's presidential election and the U.S. trade agreement behind us, and the choice of Brazil's president decided, we are more optimistic about the macro-environments of these two important markets," CEO Sergio Alonso said. "However, even under improving market conditions, we will remain vigilant, protecting and expanding our customer base across our markets while seeking to preserve and enhance our margins." 

The stock gained 10% over the last three sessions of November, and the reason for this surge is more unclear.  One possible reason may be Morgan Stanley's upgrade of McDonald's on the strength of its Experience of the Future (EOTF) program, which is centered around restaurant remodels. Arcos has already remodeled 196 restaurants and is on track to have 650 EOTF restaurants by the end of next year. 

Now what 

Arcos Dorados investors should take heart in Alonso's statement. The stock has been plagued by macroeconomic challenges in Venezuela, Brazil, and elsewhere, but investors are hopeful that the Brazilian economy, which has been in recession for much of the decade, will improve under newly elected President Jair Bolsonaro. Brazil is especially important to Arcos Dorados, given that half of the company's restaurants are located there.

Management is making smart moves, retiring debt and driving profit growth, and the EOTF buildouts should pay off. With last month's momentum, the stock may finally start to deliver the kind of results investors have long expected.

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Stocks Mentioned

Arcos Dorados Holdings Inc. Stock Quote
Arcos Dorados Holdings Inc.
ARCO
$7.57 (1.61%) $0.12
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$248.09 (1.67%) $4.08
Morgan Stanley Stock Quote
Morgan Stanley
MS
$85.00 (3.37%) $2.77

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