Take a great brand, combine it with a huge market opportunity, and you should have a terrific investment opportunity. This should be the story behind Arcos Dorados Holding Inc (NYSE:ARCO). Here is a company with the rights to open franchises in Latin America for McDonald’s Corporation (NYSE:MCD), which should be the opportunity of a lifetime. The company is reporting respectable growth, but there is one big problem standing in the way.
I Wish This Were the Whole Story
In the restaurant industry, one of the key measures of success is comparable sales growth. Arcos Dorados Holding Inc (NYSE:ARCO) is an international growth machine that has consistently posted positive comparable sales growth. Compared to some of the company’s peers, their same-store sales growth is impressive. In the last quarter, Arcos Dorados posted comparable store sales growth of 9.9%.
The company’s strong comparable store sales growth has caught analysts’ attention as well. This is the second reason investors need to watch Arcos Dorados Holding Inc (NYSE:ARCO): the company has the strongest expected earnings growth over the next few years. The average analyst expects earnings growth of more than 27% from the company.
Considering that Starbucks Corporation (NASDAQ:SBUX) is seen as a champion growth stock, and analysts expect the company to post EPS growth of more than 19.5%, certainly investors should take notice of Arcos Dorados Holding Inc (NYSE:ARCO). When you consider that McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) are also well loved stocks, and they are expected to grow earnings by 8.4% and 11.1%, Arcos Dorados looks like a huge opportunity.
Clearly a Better Value
Another positive for Arcos Dorados Holding Inc (NYSE:ARCO) investors is the company’s relative value compared to their peers. Since each of these companies pays a dividend, and has a different growth rate and P/E ratio, the best way to compare them directly is using the PEG+Y ratio. This ratio takes into account the company’s yield and growth rate total, and then compares this figure to the company’s projected P/E ratio. Since a higher yield and growth rate versus a lower P/E ratio is a better value, the higher the number the better.
Of these four companies, the one that is relatively least attractive by this ratio is Yum! Brands, Inc. (NYSE:YUM). The company has the second lowest yield at about 1.85%, and has the second lowest expected growth rate at 11.12%. Given that investors are paying over 23 times earnings for this combination of traits, the company’s PEG+Y ratio is 0.55. The second least attractive value is McDonald’s Corporation (NYSE:MCD), with a 3% yield, an 8.46% growth rate, and a P/E ratio of just over 17. This gives McDonald’s a PEG+Y ratio of 0.65.
