Posted on Monday, April 23rd, 2012 | In Current Market News, Market Commentary
Wherever you go, you always know you are close to a McDonald’s Corporation (NYSE/MCD), defined by the big yellow golden arches that you can generally spot a mile away. With over 33,000 restaurants in 119 countries, you know you will always be near the seller of the “Big Mac” whether in the U.S., Canada, Europe, China, Asia-Pacific, the Middle East, or Africa.
The stock has been a top performer in the restaurant sector over the past decade after the company made a dramatic shift in its menu offering to include healthy meals and broaden its target market. My stock analysis shows that the strategy has worked, vaulting McDonald’s to the top of the fast food chain and leaving Burger King and The Wendy’s Company (NASDAQ/WEN) behind.
You could have picked up shares of McDonald’s below $8.00 in 1990 or at the $14.00 level in 2003 before the current nine-year bullish technical trend in the stock.
At the current level, my stock analysis is that much of the top growth has been discounted into the price of the shares, but you can still play the growth of McDonald’s, specifically in the Latin America region via Arcos Dorados Holdings Inc. (NYSE/ARCO)—the largest McDonald’s franchisee in the world based on system-wide sales and number of restaurants.
Arcos Dorados operates or franchises 1,840 McDonald’s-branded restaurants in 20 Latin American and Caribbean countries and territories. Countries include Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curacao, Ecuador, French Guyana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, St. Croix, St. Thomas, Trinidad and Tobago, Uruguay, and Venezuela.
Trading at $18.45 at the close of April 19, the stock is down 37.3% below its 52-week high of $29.43. The stock has vastly underperformed McDonald’s since October 2011, according to my stock analysis.
My stock analysis is there is somewhat of a mispricing of Arcos Dorados in the marketplace, probably due to the fact the stores are situated in Latin America.
But take a look at the comparative revenue growth between the two stocks. McDonald’s is estimated by analysts to grow its revenues by 5.3% in 2012, followed by 5.8% in 2013. My stock analysis is that these are not eye-popping growth metrics. Now take a look at Arcos Dorados where revenues are estimated by five analysts to increase 12.2% to $4.11 billion in 2012, followed by 14.4% growth to an estimated $4.7 billion in 2013; these are superior growth rates based on my stock analysis.
The price/earnings to growth (PEG) ratio, which is the price-earnings multiple compared to the estimated five-year annual earnings growth rate, is another stock analysis tool for comparing stocks. McDonald’s has a PEG of 1.68, versus a more attractive PEG of 1.68 assigned to Arcos Dorados.
For Arcos Dorados, the annual earnings outlook call for $0.83 per diluted share in 2012 is up from $0.61 per diluted share in 2011, and it is expected to rise to $1.05 per diluted share in 2013.
So, while the shares of McDonald’s are on an impressive upward trajectory, my stock analysis of the chart of Arcos Dorados suggests that Arcos is a potentially more rewarding risk-reward situation.
Please note that the shares mentioned should not be construed as a recommendation to buy, but are only for illustrative purposes.
If you’re interested in the top-trending restaurant stocks in China, I have listed several in The Three Top Restaurant Stocks in China.
About Michael Lombardi (http://www.profitconfidential.com)
Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.