Despite Tuesday's Rally, Arcos Dorados Shares Well Below IPO Price

| About: Arcos Dorados (ARCO)

Leading McDonald's (NYSE:MCD) franchisee Arcos Dorados (NYSE:ARCO) reported second-quarter earnings (Transcript) yesterday and saw shares surge over 14% during the trading session. Arcos Dorados operates McDonald's in 20 countries including: Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curado, Ecuador, Guadeloupe, French Guiana, Martinique, Mexico, Panama, Peru, Puerto Rico, St. Thomas, St. Croix, Trinidad & Tobago, Uruguay, and Venezuela. Arcos Dorados is has exclusive rights in these regions, making it the only company that can own McDonald's stores in these countries.

Across all stores open more than a year, Arcos saw comparable sales growth of 10.4%. This is a great number considering sales were up against a double-digit increase from last year. In a previous article, I told readers to expect earnings upsides in the rest of the fiscal year. Total quarterly revenue was reported as $904.2 million. Net income for the quarter was $12.1 million, a decline from last year's $14.2 million. The decline came from higher currency impacts, and higher food costs. Earnings per share were reported at $0.06. Analysts on Yahoo Finance were expecting earnings per share of $0.07.

In the Brazil region, Arco saw a 9.1% decrease in sales because of weak currency. Sales were up 11.5% when currency impact was taken out. Brazil is the company's largest region. Comparable sales were up 5.6% in the quarter. The company has added 52 restaurants over the last 12 months in the large South American country.

Arco's NOLAD region saw sales increase 15.4%. The growth was led by comparable sales growth of 9.2%. The company opened 19 stores in the last 12 months in the region. In the company's SLAD region, sales increased 24.7%. Comparable sales were up 21.9%, led by Argentina and Venezuela. The company has opened 28 restaurants in the region in the last 12 months. In the Caribbean segment, Arcos saw sales increase 5.6%, with minimal comparable sales growth of 2.8%.

The company's has issued a new five-step program consisting of:

  1. Comparable sales growth
  2. Increase sales from new restaurants
  3. Margin management
  4. G & A leverage
  5. Improving EBITDA

The Summer Olympics are having a positive impact on Arcos Dorados store locations. McDonald's is an official sponsor of the Olympics and has special limited edition glasses that have customers taking frequent trips to the restaurants. The 2016 Summer Olympics head to Rio de Janeiro, and Arcos Dorados has a chance to be featured at the center of it.

Another strong growth factor for Arcos Dorados has been its CBB business. The company's combined beverage business operates stores that sell McDonald's branded beverages and no food items. The locations are found only in select regions. CBB stores feature: cafes, frappes, smoothies and beverages.

Store growth continues to be strong for Arcos Dorados. In the last 12 months, the company has opened 91 stores, compared with 86 in the prior year's period. Arcos has opened 18 stores year to date. The company reminded investors that the third and fourth quarter are usually the strongest restaurant opening quarters. Arcos Dorados had a cash position of $245 million at the end of the quarter, providing ample revenue to continue expansion in new regions.

Analysts on Yahoo Finance see Arcos Dorados earning $0.20 in the third quarter on sales of $1.03 billion. Full-year estimates are earnings of $0.61 on $3.96 billion. The following year, analysts see Arcos Dorados earning $0.80 on $4.51 billion in revenue.

Shares of Arcos Dorados are down 26% since the beginning of the year. With a current share price of $14.92, shares are trading close to the bottom of their 52-week low of $12.03 (high range $29.43). Shares went public in 2011 at above $21 and are now down 30% since their IPO. I am a shareholder of Arcos Dorados since shortly after the company went public. In a piece this year, I showed a bullish long-term case for Arcos Dorados recently. I continue to recommend the company as an international play and a great pick on the growing middle classes in many regions Arcos Dorados has locations in.

Disclosure: I am long ARCO.