The Best Restaurant Stock to Buy Not Named McDonald’s

Investors who’ve owned McDonald’s (MCD) stock over the past 15 years have seen their annualized total return beat the market by 307 basis points. So a $10,000 investment in 2007 would be worth $66,648 today.

That’s some performance.

In the past decade, the Golden Arches has seen its price-to-sales ratio increase from 3.26x sales to 8.03x. That’s significant multiple expansion. As a result, for some, the value proposition for owning McDonald’s has diminished in recent years.  

If you’re looking for alternatives to MCD, you could choose one of its competitors. Restaurant Brands International (QSR) currently trades for 5.96x sales. It owns the Tim Horton’s, Burger King, Popeyes Louisiana Kitchen, and Firehouse Subs brands.

That’s one possibility.

However, like picking an athlete in the NFL Draft, you usually want to go for the best person available. So, if you consider McDonald’s to be the best quick service restaurant (QSR) chain to own, I believe you can have your cake and eat it too by buying Arcos Dorados Holdings (ARCO), the world’s largest McDonald’s franchise by systemwide sales.

And the best part is you can have it for a fraction of the P/S multiple you’d pay to own MCD.

What’s the Story Behind ARCO?
The best part about Arcos Dorados is that it operates in Latin America. This region, I believe, will continue to be an excellent place to invest part of your portfolio because of the growth opportunities in the region.

Arcos Dorados means Golden Arches in Spanish. The company’s Executive Chairman and largest shareholder, Woods Staton, started out by operating McDonald’s Argentinian restaurants. In 2007, given the opportunity to partner with some private equity firms, bought McDonald’s Latin American operations for $700 million.

At the time, McDonald’s Latin American operations had 1,600 restaurants. Today, Arcos Dorados owns the rights to operate and grant McDonald’s franchises in 20 Latin American and Caribbean countries such as Brazil, Chile, Mexico, and Puerto Rico. It has more than 2,250 restaurants across these 20 countries employing more than 100,000 people.

If you look at its share price over the past five years, you’ll see that it’s not been an easy time. In the March 2020 correction, its share price dropped below $3. Thankfully, for those who’ve owned its stock for a long time, such as Woods Staton, ARCO is up almost 65% over the past year through March 30.

On March 16, Arcos Dorados reported its Q4 2021 results. They were outstanding.

The Latest Results Speak Volumes
Like McDonald’s, the franchisor, Arcos Dorados, follows a business strategy that focuses on the Three D’s: Drive-thru, Delivery, and Digital. All three have contributed to its strong growth in 2021.

In the fourth quarter ended Dec. 31, 2021, the company’s systemwide comparable sales, excluding Venezuela, jumped 33.6% over 2020 and 24.6% higher than 2019. Excluding currency, revenues in the fourth quarter were $777.1 million, 37.3% higher than in 2020 and 31.6% above its results in 2019.

The company’s digital channels contributed 36% of its revenue in the fourth quarter, the highest contribution in its history. In addition, its restaurant app had more than 60 million downloads in Latin America and the Caribbean in 2021, making it the first to do so in the region. Further, it has more than 10 million average monthly active users, 2.5x its nearest competitor.

For all of 2021, excluding Venezuela, the company’s systemwide comparable sales were up 38.8%, while overall revenues increased 42.2% on a constant currency basis to $2.7 billion.

In terms of profitability, its net earnings per share were $0.22, double the amount in Q4 2020. For the entire year, it earned $0.24 a share for the whole year, a marked improvement from a loss of $0.68 in 2020.

“Sales and profitability improved consistently throughout 2021 and second semester profitability set a new record in US dollars despite the challenging operating environment as well as all the currency and cost pressures of the last two years,” stated CEO Marcelo Rabach in the company’s Q4 2021 press release.

Other highlights in 2021 include opening six new restaurants, 40 of which are free-standing locations. Between 2022 and 2024, it plans to open at least 200 restaurants, 90% free-standing. Through the middle of March, it was on track to open 55 restaurants in 2022, spending $190 million on getting these restaurants up and running.

The Valuation Is Still Very Reasonable
Arcos Dorados has gone on the offensive by continuing to leverage the Three D’s to seriously outgun the competition in Latin America and the Caribbean.

The fact that it plans to invest $650 million over the next three years to open stores across the region is a commitment by management to grow its business.

“We begin the 2022 to 2024 growth cycle excited about the direction of the business. We plan to open the highest-ever three-year total of free-standing locations, re-accelerate restaurant modernizations and further expand our Digital leadership,” Rabach stated in January in its 2022-2024 business update.

“These investments, combined with normalized cash flow generation and a very strong balance sheet, will ensure Arcos Dorados is positioned to capture the full potential of the McDonald’s brand in Latin America and the Caribbean in the years ahead.”

The best part? You only have to pay 0.65x sales, one-twelfth the amount you’d pay for McDonald’s.

Sure, Latin America’s risky, but the growth potential ought to be too hard to ignore.