My top buy-and-hold idea for 2012 is Arcos Dorados (NYSE:ARCO). If you’ve just translated the name from Spanish back to English (“Golden Arches”), then you’ve probably figured out that the company is related to McDonald’s (NYSE:MCD). In fact, ARCO is the largest McDonald’s franchisee in the world, with more than 1,750 locations, largely in Latin America.
The company is new and under-followed on the U.S. stock market, having only come public in April of 2011. After a roller-coaster first six months of trading, investors now are able to buy ARCO stock pretty much where it opened up on its first day of trading.
Arcos Dorados is a play on four key themes:
- Expanding consumer spending in Latin America
- The ferocity of McDonald’s as a global brand
- Growth within a defensive sector
- The comeback potential for emerging-market equities in 2012
Let’s take a closer look at these themes:
Expanding Consumer Spending in Latin America
The first thing you need to understand about ARCO is that McDonald’s is the largest fast food chain in Latin America, serving some of the highest-growth consumer hotbeds in the world. For lower- and middle-class families in the region, eating out still is somewhat of a new concept, relatively speaking. McDonald’s is an easy, affordable gateway for these tens of millions of families, and it has become the No. 1 fast food restaurant concept in the region (ex-Mexico, where, inexplicably, Burger King rules).
While ARCO plays in Mexico, Argentina and the Caribbean (19 countries total), its main footprint lies in Brazil (50% of revenues), where a thriving middle class of 100 million people give the company an incredible amount of opportunity for growth.
The Ferocity of McDonald’s as a Global Brand
McDonald’s itself is one of the greatest global brands in history. It also is an amazing operator that consistently finds new ways to drive growth system-wide and on a store-by-store basis. This is why McDonald’s stock is making new all-time highs right now and has gone up 120% during the past five years while the S&P 500 has dropped by 20% in the same time frame.
Part of the opportunity here is that ARCO’s operating metrics are not yet up to snuff with those of McDonald’s on a company-wide basis. As ARCO becomes both a better store operator and master franchisee, it should be able to push the margins from those operations closer to McDonalds’ own, which are 19.8% and 82.4%, respectively.