Over the past six months, Arcos Dorados has been a great trade, beating the S&P 500 by 18.7%. Its stock price has climbed to $8.76, representing a healthy 25.9% increase. This performance may have investors wondering how to approach the situation.
Following the strength, is ARCO a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Does ARCO Stock Spark Debate?
Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE: ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.
Two Things to Like:
1. New Restaurants Popping Up Gradually, Supports Growth
A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.
Arcos Dorados sported 2,479 locations in the latest quarter. Over the last two years, it has opened new restaurants quickly, averaging 2.8% annual growth. This was faster than the broader restaurant sector.
When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.
2. Surging Same-Store Sales Show Increasing Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Arcos Dorados has been one of the most successful restaurant chains over the last two years thanks to skyrocketing demand within its existing dining locations. On average, the company has posted exceptional year-on-year same-store sales growth of 22.7%.
One Reason to be Careful:
Breakeven Free Cash Flow Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Arcos Dorados broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
Arcos Dorados has huge potential even though it has some open questions, and with its shares beating the market recently, the stock trades at 7.2× forward EV-to-EBITDA (or $8.76 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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