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World Cup Won't Polish Arcos Dorados

By Rich Duprey – Feb 25, 2014 at 5:02PM

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The McDonald's franchisee may get a small kick, but it won't last long.

The year is less than two months old, but Latin American McDonald's franchisee Arcos Dorados (ARCO -1.72%) has already lost nearly 30% of its value and is down more than 40% from its 52-week high. It's clear it needs a swift kick in the, er, grass to get going again, but with the FIFA World Cup coming to Brazil in June and running through mid-July, the hope is it will score big. Unfortunately, whatever lift the restaurant operator gets from the games is likely to be short-lived.

Source: Arcos Dorados.

Underlying trends don't seem to bolster the bull thesis for Arcos Dorados. The burger flipper derives nearly half of its revenues from Brazil, Latin America's largest economy and until recently its best performer. And while management has slowed its store-opening program just a bit, it continues to spread out across the landscape at a manageable pace, but earnings continue to be pinched.

The economic strains reaching out across Latin America pose a big hurdle for the restaurant operator. Brazil's currency, for example, has been in free fall; the real declined 15% last year against the dollar while interest rates have been on the rise. At the same time, growth is slowing and the International Monetary Fund is scaling back its forecasts for 2014.

Yet even the source of hope for its recovery, the World Cup, has unleashed massive demonstrations in Sao Paolo over the lavish spending that's been showered on the games all the while people are going hungry. Having bid billions of dollars to host the games, followed in 2016 by the Summer Olympics, Brazil finds itself with a massive budget deficit it must close. Late last year the government unveiled a tax amnesty program to bring in delinquent payers in the belief it was better to have some of the total up front to cut its deficit rather than nothing of a lot.

Brazilian mining giant Vale was forced to accept the tax amnesty plan that allowed it to dramatically reduce its $16 billion bill so long as it paid a portion up front and then the balance over the next 15 years. Vale had been arguing it owed no tax, that it was being double-taxed for sales that it had made decades ago. Analysts are still expecting Brazil to receive a ratings downgrade.

Argentina isn't much better; in fact, it's a whole lot worse. As part of Arcos Dorados' second-largest unit behind Brazil, the southern Latin American division that also comprises Chile, Colombia, Ecuador, Peru, Uruguay, and Venezuela -- itself in the midst of violent protests -- Argentina is driving its economy headlong into chaos with arbitrary monetary policies. President Cristina Kirchner recently imposed fines on retailers Wal-Mart, Carrefour, and others for failing to keep in stock enough inventory of products she had placed price controls on. Venezuelan President Nicolas Maduro is doing the same, and Arcos Dorados had to agree to cut the price of a Big Mac Combo there 7.5%, with french fries and soft drinks falling 10%, as the government sought to "counterattack" against the "parasitic bourgeoisie."

Burger King Worldwide, which is expanding its presence in Latin America, also suffered setbacks. Despite having 11% more stores there by the end of last year, revenues fell 5.5% year over year.

Arcos Dorados will report its earnings next month, and more than likely they'll be just as tough as they've been for the past few quarters, but investors will be just as likely to get a boost in the buildup to the World Cup games. Once that euphoria wears off, however, it's probably back to business as usual, and these days that's amounted to a kick in the pants.

Rich Duprey does not own shares of any of the companies listed in this article. The Motley Fool recommends Burger King Worldwide and McDonald's. It owns shares of Arcos Dorados, Vale, and McDonald's. 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 Motley Fool has a disclosure policy.

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