A Leader in Quick Service Restaurant Market
Arcos Dorados is considered the largest operator of McDonald’s restaurants in 20 countries in Latin America, including Argentina, Aruba, Brazil, Chile, Columbia, Peru, etc. $3.5 billion of the company’s sales, or 95.7% of the total revenue, was generated from the company-operated restaurants, whereas the sub-franchise restaurants only generated $153.5 million in revenue in 2011. Arcos Dorados is the leader in the quick service restaurant sector in Latin America. In 2011 McDonald’s had around 1,840 restaurants, with a 9.9% market share. The second largest player, Burger King Worldwide Inc (NYSE:BKW), with more than 1,000 restaurants, and owns a 3.1% market share.
Huge Growth Potential
For the past three years Arcos Dorados has been growing both revenue and net income significantly. The revenue has increased from $2.66 billion in 2009 to $3.66 billion in 2011, while the net income has risen from $80 million to $116 million in the same period. The operating cash flow has also followed the same rising trend, from $148 million in 2009 to $262 million in 2011. Arcos Dorados employed a reasonable amount of debt in its operation. As of September 2012, it had $700 million in total shareholders’ equity, $244 million in cash, and $651 million in long-term debt. Over the past 12 months, Arcos Dorados generated a profit margin of 3.11%, and the return on equity was 17.3%. Interestingly, Arcos Dorados is the exclusive franchise of McDonald’s restaurants. Fool contributor Nathan Parmelee commented that there are more than 14,000 McDonald’s restaurants in the US, a country that has 313 million people. Arcos Dorados had only 1,840 McDonald’s restaurants in 20 Latin American countries, which have the combined population of 500 million. Thus, the potential growth for Arcos Dorados is huge.
High Insider Ownership and Experienced Management Team
What impressed me was the highly experienced management team. All members of the management team have been with the company for between 18 and 24 years. Woods Staton, the Chairman and CEO, has worked for the company for 26 years. German Lemonier, the CFO, and Sergio Alonso, the COO, have been with the company for 20 years. Moreover, the company had a high insider ownership. The biggest shareholder, Los Laureles, owns 38.2% of the total economic interests and 75.5% of the total voting interests in Arcos Dorados. Los Laureles is actually owned by Chairman Woods Staton. In addition, Mr. Staton directly owns 1.8% of total economic interests and 0.7% of the total voting interests in the company. On the combined basis, Staton controlled Arcos Dorados with 40% of total economic interest and 76.3% of the total voting interest.
Reasonable Valuation
At the current trading price of $13 per share, the total market capitalization is $2.72 billion. The market is valuing Arcos Dorados at 13.8x forward earnings, 4x book value. The company is paying investors a 1.8% dividend yield. McDonald’s is a much bigger corporation, with a $94.23 billion market cap. McDonald’s is valued at 14.7x forward P/E and 6.9x book value. It is paying a better dividend yield at 3%. Burger King, with $5.64 billion in market cap, is just a bit bigger than Arcos Dorados. At the current trading price of $16.15 per share, Burger King is valued at 19x forward earnings and 5.1x book value. Its dividend yield is the lowest of the three, at only 02%.
Foolish Bottom Line
Indeed, Arcos Dorados is a fast growing business of McDonald’s in Latin America. With a leadership position in the quick service restaurant market, significantly high insider ownership, and a reasonable valuation, Arcos Dorados could fit well in investors’ growth portfolios.
The article A Fast Growing McDonald’s in Latin America originally appeared on Fool.com and is written by Anh HOANG.
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