Arcos Dorados: Poised for a Comeback?

by Alyssa Oursler | August 7, 2012 3:45 pm

Arcos Dorados: Poised for a Comeback?

best stocks for 2012 logo1 Arcos Dorados: Poised for a Comeback?[1]Judging by the leaderboard for InvestorPlace‘s 10 Best Stocks for 2012[2] contest, Arcos Dorados (NYSE:ARCO[3]) sure doesn’t look like a winner.

But looking at today’s movement, it doesn’t seem so bad.

Shares of the McDonald’s (NYSE:MCD[4]) franchiser saw gains up to 15% on the heels of its second-quarter earnings report, as organic revenue and same-store sales continue to grow[5].

It’s a silver lining for what has been a rough year for ARCO — the company still has lost around a quarter of its value since the start of 2012.

In fact, after the first quarter rolled to a close, Josh Brown, who picked Arcos Dorados for the contest, was searching for an exit[6] — and rightfully so. Net income had fallen 28% year-over-year and the stock subsequently saw its value drop substantially — a grand year-to-date total of 27%.

While Brown held to his original thesis[7] about the stock’s strengths, he admitted things had gone awry in a few aspects.

To start, ARCO’s management team had been unable to control expectations, and the political situation in some of the countries ARCO operates grew shakier. But most noticeably, the company has been crushed by currency exchange. The depreciation of local currencies, compared to a strong U.S. dollar, has made for some less-than-stellar numbers (like said 28% drop in income). And, at that point, those numbers were overshadowing any promising news — and there was some — so investors went running.

This quarter, though, despite the fact that the same problems have stuck around, people seem to be noticing what Arcos Dorados actually is doing right: growing.

Last quarter, revenue increased by 12% year-over-year — and by 17% on a constant currency basis — and same-store sales increased by 12% from the same time in 2011. Still, shares fell hard after the report.

This quarter, revenue only increased by 2% (once again thanks to currency fluctuation) — but that translated to 16% gains on an organic basis. And same-store sales increased again, this time by 10%. Earnings did miss estimates by a cent, coming in at 6 cents per share, but investors were far from troubled this time around. Growth might be slowing since 2011, but that’s in part because 2011 saw massive increases[8] in revenue and comparable-store sales.

On the managing expectations front, the company also lowered its 2012 forecast of EBITDA growth to 8% to 10%, down from 10% to 12%, but still expects revenues to grow between 15% to 17%.

CEO Woods Staton patted the company on the back, but also admitted its struggles:

“Our operations continue to be very strong, led by higher average check growth, increased guest counts and successful marketing activities across all regions. The result is double digit organic revenue growth, which is on target with our expectations. While various economic issues persist in the region, the underlying strength of our enterprise is indisputable and will serve as a driver of ongoing future revenue growth.”

And yes, Arcos’ underlying strengths — including the ferocity of McDonald’s as a global brand — might hold true, but the company still has a tough task ahead to solve the many regional economic issues that Staton nodded to.

Brown had thought one strength, for example, was expanded consumer spending in Latin America, but Brazil’s delayed recovery[9] of consumer spending has told another story. Brazil’s economy is expected to grow by about 85 basis points slower than its 2.7% rate in 2011, and part of the reason ARCO is tempering its forecasts.

Still, this report belongs in the win column for Arcos Dorados. Tuesday’s gains helped stem months of bleeding, and showed ARCO still has upside potential going forward.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/best-stocks-for-2012/
  2. 10 Best Stocks for 2012: http://investorplace.com/best-stocks-for-2012/
  3. ARCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARCO
  4. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  5. continue to grow: http://investorplace.com/2012/08/arcos-dorados-jumps-on-same-store-sales/
  6. was searching for an exit: http://investorplace.com/2012/05/arcos-dorados-que-es-un-desastre/
  7. held to his original thesis: http://investorplace.com/2011/12/arcos-dorados-mcdonalds-stock-emerging-market/
  8. saw massive increases: http://www.dailyfinance.com/2012/08/07/why-arcos-dorados-is-soaring/
  9. delayed recovery: http://www.foxbusiness.com/news/2012/08/07/mcdonald-franchiser-arcos-dorados-shares-rally-after-results/#ixzz22szRHd6o

Source URL: http://investorplace.com/2012/08/arcos-dorados-poised-for-a-comeback/
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