A Fast Growing McDonald’s Corporation (MCD) in Latin America: Arcos Dorados Holding Inc (ARCO)

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McDonalds (MCD),General Electric (GE),Schlumberger Ltd (SLB),Honeywell (HON),Baker Hughes Inc (BHI),Air Products & Chemicals (APD),Ingersoll-Rand Plc (IR),Parker Hannifin Corp (PH),Cooper Industrials (CBE),Kansas City Southern (KSU),IDXX,Shaw Group (SHAW),The Motley Fool has released the top 7 stocks that were recommended by Fool’s analysts for 2013. Out of these 7 stocks, I have talked about two companies, including Tile Shop Holdings Inc, the tile retailer, and Western Refining, Inc. (NYSE:WNR), an independent crude oil refiner.  In this article, I will cover one more mid-cap stock on that list. It is Arcos Dorados Holding Inc (NYSE:ARCO), the Argentina-based McDonald’s Corporation (NYSE:MCD) master franchisee. Let’s see whether or not we should buy this stock now.

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.

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