eersing's  Instablog

Arcos Dorados (ARCO) is down nearly 30% in the past three months. This vast under-performance should be investigated, as I believe there to be significant potential gains from this security in the coming quarter.

ARCO is a franchising company for McDonald's restaurants in Latin America. They currently operate over 1,840 restaurants in over 20 countries, are the largest McDonald's franchisee in the world, and is one of Latin America's ten largest employers. Given the massive scale of the business operations of the company, there seems to be a great potential for growth in the developing economies of Latin America. In the United States alone, there are over 13,000 McDonald's. Given the fact that the United States has an approximate population of 313 million people, and Latin America has a total population of approximately 570 million, it seems to be obvious that McDonald's still has a strong potential to grow in the region given that there are almost 11,000 more Mcdonalds restaurants in the United States than in all of Latin America.

Understanding that there is the potential for long term growth is the first criteria that must be satisfied when considering a potential investment. Second, management and evidence for capturing the potential growth is vital to successful investment choices. Arcos Dorados is one company that warrants such investigation.

Historically, McDonald's has been a secure stock. With stable growth, consistent dividend payment, and a dominance over their competitors, they have been a very strong pick over the past decade. ARCO is a new piece to the McDonald's puzzle, and although it is a separate entity, it is highly correlated with the success of McDonald's. Given the fact that this company is a relatively newly publicly traded company, and that the stock has dropped to 13.40 a share compared to their average price of around 20.5 dollars per share over the past year, there is a significant opportunity for capturing some profits from this unexpected decrease in price.

Up until this past quarter, since their IPO, ARCO has consistently performed in line with McDonald's. This past year, as economic performance increased, McDonald's was able to provide a higher level of investment in their growing markets such as Latin America. As the economy became more skeptical about future performances, mainly starting in March, with the heaviest drops seen throughout May, levels of outflows of capital away from the domestic US market decreased. With this, ARCO has seen their ability to grow slow, and this has been reflected by a drop in their stock price of approximately 30% in the past three months.

When it comes to good investment opportunities, the best time to buy are when good companies are down. It appears that with ARCO, this could be one of these times. ARCO is a major player in the global expansion of McDonald's, and it can be expected that their role will continue to grow.

Since 2007, Arcos has seen net income rise from 6.23M to 115M. Their EPS has increased by 33.33% from 2009 to 2010, and by 22.73% from 2010 to 2011. With an average target price of 18.21 according to MarketWatch, this price would provide investors with a return of 35.9%.

Given this elementary overview of the company's environment and operations, it seems clear to me that ARCO presents a strong opportunity to buy, and their performance should be monitored over the next quarter very closely. The potential ROI for ARCO appears to be extremely attractive, and if I am going to invest in a company that I have little first hand interaction with, it might as well be one that is heavily associated with one of the most successful restaurant companies in history.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.