End of the diet: Arcos Dorados beats estimates and accelerates the opening of restaurants

Arcos Dorados, McDonald’s master franchisor in Latin America, may have disappointed consumers and irritated Procon with a McPicanha that had no steak, but investors couldn’t be happier after an extraordinary result in the first quarter.

In the balance sheet released today, the company listed on the New York Stock Exchange beat virtually all analysts’ estimates, making a record Ebitda for the third consecutive quarter, with a margin gain that defied inflation and is allowing restaurant openings to accelerate.

In the quarter, Arcos Dorados’ gross margin reached 66.7%, above pre-pandemic levels. The Ebitda margin also surpassed the first three months of 2019 (10.1% against 8.5%). “This is a very remarkable result, given the pressure of cost inflation that the entire industry has been suffering,” said analysts Joaquin Ley, Alejandro Fuchs and Eduardo Sucarrats, from Itaú BBA.

In a demonstration of the post-pandemic recovery, sales of Arcos Dorados grew 40.6% in the quarter and reached US$ 787 million. In Brazil, the main market of McDonalds’s master franchisor, net revenue reached US$ 312 million, a jump of 53.5% in the annual comparison.

Driven by strong operating results, Arcos Dorados beat profit estimates, closing the quarter with US$ 23 million. In Brazil, the operator of McDonald’s stores also beat the good result of rival Burger King Brasil — the Ebitda margin of Arcos Dorados in the country reached 14.8%, while BK did 12.6%.

In the sell-side reports, analysts noted that Arcos Dorados’ strong operating cash flow — $35 million in the quarter, five times more year-on-year — enabled rapid deleveraging. In March, the leverage ratio (net debt/Ebitda) reached 1.3x. At the height of the pandemic, with almost all restaurants closed, the indicator went from 7 times.

With a comfortable capital structure (Morgan Stanley analysts recalled that Arcos Dorados will only have relevant maturities from 2027 onwards), the way is clear for the opening of more stores. No wonder, management signaled to investors in a conference call that it will exceed the guidance of 55 new stores in 2022. The total number should now be close to 65. “The diet is over”, wrote Marcella Recchia, from Credit Suisse.

In this scenario, the valuation of the firm controlled by the Colombian Wood Staton looks like a double Big Mac promotion. At the current price, Arcos Dorados is trading at a multiple (EV/Ebitda) of 6 times. The historical average for the asset is between 7.5 times and 8 times. “Given the momentum, it’s a cheap valuation,” analysts at Itaú BBA said.

Arcos Dorados is valued at US$ 1.6 billion on the stock exchange. In the year, the paper rose 26%.

Source: Value Pipeline