5 Reasons Why Arcos Dorados Is a Perfect Investment for 2024

 | Oct 03, 2023 03:55PM ET

  • Arcos Dorados is McDonald's largest franchisee, with exclusive operations in 20 countries.
  • Its markets are expected to lead local economies and global growth.
  • The stock trades at a value to McDonald's, pays a dividend, and has a lower beta.

    • Arcos Dorados Holdings Inc (NYSE:ARCO) is worth a look if you are looking for a perfect place to position money for 2024. The company is a significant player in a growing industry; it has emerging market exposure, outperforming, provides yield and value, and the sell-side is interested. These factors suggest the uptrend in the stock will continue, and investors will see high double-digit gains by the end of the following calendar year.

    h2 #1- Arcos Dorados Is a Leader In Fast-Food /h2

    If you haven’t already figured it out, Arcos Dorados (Golden Arches) is a franchisee of McDonald’s Corporation (NYSE:MCD). The company is headquartered in Montevideo and has exclusive rights to operations in 20 countries, making it the largest MCD franchisee. Globally, fast food is a hot industry. Fast food and quick-service restaurant growth is forecast to run above 5.0% annually through 2030 in the US, with emerging markets outpacing globally. McDonald’s is posting solid double-digit gains in 2023, expected to continue in 2024.

    h2 #2- Emerging Markets Will Lead Developed Markets In 2024/h2

    The growth outlook for Latin America in 2024 is not robust but is expected to double that of the US and other developed markets. That is a tailwind for outperformance in 2024 that is enhanced by Arcos Dorados’ industry and brand. To put the EM/fast food angle into perspective, fast food growth in Mexico is expected to outpace broader economic growth by 3:1 over the next few years. The Mexican fast-food industry is forecast to grow at a nearly 9% CAGR through the end of this decade, producing 67% growth in just the next 5 years, compared to a lower 5% CAGR for the US industry, and below 1% for the US in total for 2024. Similar forecasts exist for other markets in Latin America.

    #3- McDonald’s and Arcos Dorados Outperform In Q2 /h2

    McDonald’s put in a solid performance in Q2 2023 with double-digit 13% top-line growth compared to slower growth and even contraction for burger-centric names like The Wendy’s Co (NASDAQ:WEN), Restaurant Brands International (NYSE:QSR) and Jack In The Box Inc (NASDAQ:JACK). McDonald’s posted solid double-digit growth in all regions, with International comps up 11.9% in developed regions and 14% in EMs.

    Within that, Arcos Dorados led the International segments with a top-line result 17% better than last year and a margin nearly doubled. Arcos Dorado's comps are more impressive, with comp sales up 31.5% in established territories and digital, including self-serve kiosks, accounting for nearly 50% of the net. Arcos Dorados did not give specific guidance; analysts expect revenue to grow by 6.5 in 2024 and EPS by 7.5%.

    h2 #4- Arcos Dorados Offers Value and Yield /h2
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    Arcos Dorados comes with higher-than-average risk because of its exposure to emerging markets, but the brand, value, yield, and beta mitigate it. McDonald’s is a well-established global player, so it provides an element of safety for ARCO investors. Shares of ARCO trade at a low 13X earnings, which is cheap compared to the S&P 500 and well below MCD’s 23X earnings. The yield is lower than MCD at 1.9% and has been erratic over the past few years but appears sustainable. The payout ratio is only 24% of earnings, and earnings growth is in the outlook. Both stocks trade with a beta near 0.55, but Arcos Dorados' is the lower.

    h2 #5- Analysts Are Raising Their Targets, Institutions Buy ARCO/h2

    There are only 3 analysts with current ratings for ARCO stock, but the data is telling. The 3 with ratings are JPMorgan Chase (NYSE:JPM), Bank of America, and Barclays, which all rate the stock a Buy. They each raised their price target for the stock earlier this year and see it moving up an average of 35% and at least 25% at the low end of the range. This is in addition to an uptick in institutional activity. Institutions own about 36% of the stock and bought more than 5% in Q3 2023.

    The ramp in Q3 purchases is consistent with a bottom in the market. Shares of ARCO fell following the Q2 earnings report but found support at critical levels. Those levels are consistent with the long-term moving average and may provide a springboard for the market. The next visible catalyst is the Q3 earnings report due in early November.