Arcos Dorados Holding Inc (ARCO), McDonald’s Corporation (MCD): Debt Is a Universal Language

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%.

Some of Arcos Dorados Holding Inc (NYSE:ARCO)’ peers are the aforementioned McDonald’s Corporation (NYSE:MCD), Yum! Brands, Inc. (NYSE:YUM), and Starbucks Corporation (NASDAQ:SBUX). Each of these companies has strong international operations, and some even go head to head with Arcos Dorados for customers. Looking at McDonald’s same-store sales growth of about 1%, Yum! Brands’ gain of about 2%, and Starbucks’ same-store sales up about 6%, you can see just how well Arcos Dorados is doing. It would be one thing if Arcos Dorados posted these impressive numbers in just one quarter, but the company isn’t a flash in the pan.

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.