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There’s More Than One Way to Profit Off McDonald’s

Why not try a play on the Golden Arches' biggest franchisee?

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McDonald's MCDCan you name the top-performing stock in the S&P 500 year-to-date? As of Dec. 2, it was Cabot Oil & Gas (NYSE:COG) at 132.7%. How about the top-performing restaurant stock in the S&P 500? Chipotle Mexican Grill (NYSE:CMG), up 51.9% YTD. The former McDonald’s (NYSE:MCD) spinoff has had a fine year. So too has its former parent, which has gained 28.2%.

Normally, when I recommend the sale of one stock and the purchase of another, it’s usually because one company is either much cheaper or much better. In this situation, I’m recommending investors sell McDonald’s and buy stock in its largest franchisee, Arcos Dorados Holdings (NYSE:ARCO) because the opportunities that exist in Latin America are too great to ignore. However, I wouldn’t hold it against you if you decided to own both.


Arcos Dorados went public in April 2011, selling 84.5 million class A shares at $17 each. The company itself sold slightly more than 9.5 million shares for net proceeds of $152.3 million, while existing shareholders sold the remaining 75 million shares. Arcos Dorados is using its share of the proceeds for the opening and re-imaging of its restaurants. It then did a secondary offering at the end of October, with existing shareholders selling an additional 44.5 million shares at $22 each.

Since the secondary offering, ARCO stock basically has flatlined but still is up 32.1% through Dec. 2. As the world’s largest McDonald’s franchisee with 1,767 locations in Latin America, its future appears bright.

The Business

Arcos Dorados has the exclusive right to own, operate and grant franchises of McDonald’s restaurants in 20 countries, including Brazil, Chile, Mexico and Venezuela. Brazil is by far ARCO’s most important country, generating 52% of its overall revenue for the first six months of 2011 and 69% of adjusted EBITDA. Arcos Dorados accounts for 5.1% of McDonald’s global sales and is the largest fast food chain in Latin America. The company itself paid $141 million in royalties to McDonald’s in 2010, and that doesn’t include what the franchisees themselves paid to the Golden Arches.

Arcos Dorados CEO Woods Staton, along with a consortium of investors, acquired McDonald’s Latin American operations for $700 million in August 2007. Staton brought McDonald’s restaurants to Argentina more than 20 years ago and since 2004 also was in charge of McDonald’s South American restaurants. At the time of the acquisition, McDonald’s faced the wrath of activist investor Bill Ackman, who was demanding it increase the rate of dividends and share repurchases. The Latin American operations were a casualty of its restructuring. The move worked, as MCD stock has more than doubled since then compared to a 19% loss for the S&P 500. This is a reminder that acquisitions sometimes can be win-win situations.

Article printed from InvestorPlace Media,

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