Arcos Dorados (ARCO), the largest operator of McDonald's (NYSE:MCD) restaurants in Latin America and the Caribbean, and the world's largest McDonald's franchisee, reported decent Q2 results. However, Mr. Market was not so happy and sent the stock 4% lower after the earnings release, before recovering to -1.6% at the close.
While Arcos Dorados reported a net loss during Q2 2017 compared to a net profit during the same period last year, its underlying performance was strong.
Revenue and EBITDA from Brazil (Arcos most important division) saw some nice improvements.
|Brazil '000 000||Q2 2016||Q2 2017(constant currency growth only)||Growth %|
|# of restaurants||884||910||+2.9%|
|Revenue||309.4 USD||325.6 USD||+5.2%|
|EBITDA||30.5 USD||42 USD||+37.7%|
|EBITDA Margin||9,9%||13,8%||+392 bbp|
Keep in mind that these figures were achieved, despite a still soft consumer environment in the country. Brazil is still going through a tough recession.
NOLAD (the Northern Latin America Division) & SLAD (the Southern Latin America Division) also performed strongly, but saw their EBITDA margins decline slightly due to higher food & packaging costs and payroll expenses that were not completely offset by higher prices.
Management prefers to keep volumes high and doesn't want to scare consumers away by increasing prices too much in the short term. A strategy that I support.
|NOLAD '000 000||Q2 2016||Q2 2017(constant currency growth only)||Growth %|
|# of restaurants||516||515||-0.2%|
|Revenue||88.2 USD||99 USD||+12.2%|
|EBITDA||7.8 USD||8.7 USD||+11.5%|
|EBITDA Margin||8.9%||8.7%||-20 bbp|
|SLAD '000 000||Q2 2016||Q2 2017(constant currency growth only)||Growth %|
|EBITDA||15.6 USD||18.9 USD||+21.15%|
|EBITDA Margin||8.2%||7.7%||-50 bbp|
The Caribbean division, which includes Venezuela also delivered a significantly better result.
|Caribbean '000 000||Q2 2016||Q2 2017(constant currency growth only)||Growth %|
|Revenue||98.7 USD||142.8 USD||+44.7%|
|EBITDA||1.5 USD||13.5 USD||+822.5%|
|EBITDA Margin||1.5%||9.4%||+790 bbp|
If you're an Arcos Dorados investor, you should already know by now that Arcos Dorados has the exclusive rights to own, operate and franchise McDonald's restaurants in 20 countries and territories in Latin-America. These countries include Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guyana, Guadalupe, Martinique, Mexico, Panama, Peru, Puerto Rico, St. Croix, St. Thomas.
The above mentioned figures exclude any currency translation, but currency translations normally do have a materially important impact on the business, and the impact can vary widely from quarter to quarter.
I excluded the currency impact in the tables above to give you a better view of the performance of the underlying business. To see the full figures click here.
Balance sheet remains decent
While Arcos Dorados doesn't have a small amount of debt (626 million USD), its net debt for the quarter stood at 389 million USD due to a strong cash position of 237 million USD.
ARCO Net Financial Debt (Quarterly) data by YCharts
Net debt/EBITDA was at 1.4, a strong improvement from the 1.7 at the end of 2016. Total leverage was at 4.05, below the required 4.25, as stated in the covenants of the Master Franchise Agreement.
Arcos Dorados has proven that it can successfully operate and execute, even when times get tough. Not so long ago, Arcos net debt was at ~760 million USD, today it's at 389 million USD.
I expect the company to continue to deleverage, while growing its number of restaurants (+42 during the last twelve months).
At a price to sales valuation of 0.62, Arcos Dorados can hardly be called an expensive stock. Mother company McDonald's is valued at 5.3 times its sales, while competitor Yum Brands (YUM) is valued at 7.7 times its sales.
ARCO PS Ratio (TTM) data by YCharts
If Arcos Dorados were to be valued at ~1 times its sales, it would have a market cap of 3 billion USD, which I consider a fair price for the company as of now.
Disclosure: I am/we are long ARCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This should not be considered professional investment advice. Always do your own research.