This Latin American McDonald’s franchisee is forecasted to grow earnings by 101.5% this year.
Arcos Dorados Holdings Inc. (ARCO)
From Cabot Undervalued Stocks Advisor
Arcos Dorados, which is Spanish for “golden arches,” is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina, and Chile. Arcos’ leadership looks highly capable, led by the founder/chairman who owns a 38% stake.
The shares are undervalued as investors worry about the pandemic, as well as political/social unrest, inflation, and currency devaluations. However, the company is well-managed and positioned to benefit as local economies re-open, and it has the experience to successfully navigate the complex local conditions. Debt is reasonable relative to post-recovery earnings, and the company is currently producing positive free cash flow.
Arcos reports second-quarter results on Wednesday, August 11. The consensus earnings estimate is for a $(0.04)/share loss. Nancy’s Note: Arcos reported EPS for $0.04 per share and revenues of $591.28 million, both surpassing analysts’ estimates.
There was no significant company-specific news in the past week.
ARCO shares fell 4% this past week and have about 30% upside to our 7.50 price target. The stock will likely remain volatile until we have more clarity on its earnings and the effects of the pandemic, including the Delta variant, on its outlook. We remain steady in our conviction in the company’s recovery. The low share price offers a chance to add to or start new positions in ARCO.
The stock trades at 20.6x estimated 2022 earnings per share of $0.28 (unchanged from a week ago). The 2021 estimate remains unchanged at $0.04. The 2023 consensus estimate of $0.34 is also unchanged. We’ll no doubt see these estimates change following the earnings report later this week. BUY.
Bruce Kaser, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, August 11, 2021