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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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The Opportunity

Staton has a lot riding on the success of Arcos Dorados. Personally and through a holding company, he is the beneficial owner of 39.7% of the total economic interests of the company and controls 76.1% of the votes. If ARCO’s third-quarter results are any indication, Staton has little to worry about.

Systemwide comparable sales grew 15.7%, and overall revenues on a constant currency basis were up 19.8%. All four of Arcos Dorados’ operating segments experienced revenue increases in the quarter, including 24.4% YOY growth from its most important market in Brazil. Its biggest success on a same-store sales basis was its Southern Latin American division, which saw a 31.7% increase, while the biggest disappointment was its Caribbean operations, declining by 1.9% because of a difficult economic climate in the region.

However, the Caribbean accounts for less than 10% of overall revenues and 2.6% of adjusted EBITDA, so it’s not a big deal. Brazil, on the other hand, managed to increase adjusted EBITDA in the first three quarters by $45 million, or 27.4% YOY. Brazil is now and will continue to be its driver of growth.

Bottom Line

Arcos Dorados expects 2011 full-year earnings of $125 million, or $0.58 a share. Analysts expect ARCO to grow earnings 21% each year for the next five. If so, the company’s earnings by the end of 2016 would be $1.50 per share. That’s a forward P/E of 14.9 times with a growth rate that’s 50% higher.

Something’s got to give, and I believe it’s the share price. If everything unfolds as planned, Arcos Dorado’s earnings will grow twice as fast as McDonald’s itself. That has to be worth more than $22 per share.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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