Arcos Dorados Earnings Disappoint; Expect Upside In 2012

| About: Arcos Dorados (ARCO)
This article is now exclusive for PRO subscribers.

Arcos Dorados (NYSE:ARCO), the largest McDonald's (NYSE:MCD) franchisee in the world, reported their fourth quarter earnings and full year results Monday morning. The results were disappointing for investors as shares traded down close to 10% at one point before settling at $19.20, or a 7.5% decrease for the day. Over 4.2 million shares traded hands on the open market on more than average volume. Average volume for the past three months has been 1.3 million. Shares traded in a range of $18.71 to $21.19 for the day.

In my last article about a Morgan Stanley downgrade on Arcos Droados, I called for a fourth quarter earnings beat and rally in the share price. Neither one of these happened but instead the opposite held true with an earnings miss and a haircut in the share price. For the fourth quarter, analysts had expected $0.26 earnings per share. Analysts expected $0.58 per share for the full year. Arcos reported $0.22 for the quarter and $0.54 for the full year.

Fourth quarter net income increased 12%, mainly as a result of higher prices in its restaurants. Revenue was reported at $958.5 million, which was an 11% increase from last year's fourth quarter. The $0.22 earnings per share was an increase from last year's $0.17, but fell short of analyst's targeted growth. Higher tax costs along with payroll, food, and paper costs attributed to a decrease in margins and profit for the company's fourth quarter.

Fiscal 2011 saw revenue of $3.66 billion and net income of $115.5 million. These compare to $3.02 billion and $106 million in the 2010 reporting period. Earnings per share increased from $0.44 to $0.54 for 2011. Revenue increased 21.2% for the full year. The company ended the fiscal year with a cash position of $176 million and $532 million in long term debt.

Comparable sales at restaurants open more than a year were impressive and improved in many of the company's regions for the fourth quarter. By region they break down to:

Region: Brazil

  • Countries: Brazil
  • Revenue: +4.7%
  • Comp Sales: +6.3%

Region: NOLAD

  • Countries: Mexico, Panama, Costa Rica
  • Revenue: +7.2%
  • Comp Sales: +8.4%

Region: SLAD

  • Countries: Argentina, Venezuela, Colombia, Chile, Peru, Ecuador, Uruguay
  • Revenue: +25.2%
  • Comp Sales: +27.8%

Region: Caribbean

  • Countries: Puerto Rico, Martinique, Guadeloupe, Aruba, Curacao, French Guinea, Trinidad & Tobago, St. Thomas, St. Croix
  • Revenue: +1.0%
  • Comp Sales: -2.2%

Arcos Dorados pays out a quarterly dividend of $0.059, which is good for an annual amount of $0.236. This represents a 1.2% annual dividend, which is about half of what McDonald's pays out to shareholders. Arcos Dorados paid out 43% of its earnings for 2011 on an annual dividend basis for 2011. This is a little misleading since only three quarterly dividends were paid out for the year (June, September, and December).

There were 1,770 locations open for Arcos Dorados at the end of 2011 when I last wrote about the shares. During the earnings release, the company now reported that there are 1840 locations open. The company plans on opening 130 more locations throughout the year.

Arcos Dorados has forecasted revenue of $4.21 to $4.28 billion for the 2012 fiscal year. This is equivalent to an increase of 15-17% in revenue. Analysts on Yahoo are forecasted revenue of $4.07 billion and earnings per share of $0.89.

The company, which went public last year at a price of $17, is still trading above its initial price offering. As I recommended before, the company is a great long term play as its restaurants are in developing markets with rising middle classes. Brazil, which is the company's largest market, will host the 2014 World Cup and 2016 Summer Olympics.

I bought shares of the company shortly after the IPO, and have added to my position once since that time. I continue to hold shares as one of my top four holdings and recommend looking at this long term play.

Disclosure: I am long ARCO.