Making a Mint on the “McDonald’s of Latin America”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

After apparently stabilizing at the beginning of last week, global markets once again took a turn for the worst by selling off sharply on both Thursday and Friday. I believe that this is a classic case of a panic, followed by a re-test of previous lows. You normally see a one to three-day rally from a crash (or mini-crash), then a re-test of the lows. That’s exactly what we’ve seen so far. Only if markets break through the downside of around 1,119 on the S&P 500 hit on Aug. 8 — and stay there for several days — are all bets off.

If the market holds up as I expect, last week’s Bull Market Alert pick, Proshares Ultra S&P500 (SSO), and this week’s pick, Arcos Dorados Holdings Inc. Cla (ARCO), should bounce strongly in the coming weeks.
The best way to think of Arcos Dorados is (literally) the “McDonald’s of Latin America.” You, of course, know about McDonald’s (MCD), the global giant that operates in 119 countries on six continents. Yet, for all its popularity, McDonald’s never really took off in Latin America, thanks to a lost decade as the combination of currency devaluation, economic turbulence, litigation and mismanagement sunk many franchisees. For “Mickey Ds” to be successful in this rough-and-tumble part of the world, it needed the local knowledge of "Arcos Dorados" — meaning “Golden Arches" in Spanish.
Today, Arcos Dorados is the largest McDonald’s franchisee in the world with more than 1,767 restaurants in 19 countries in Latin America and the Caribbean. Arcos Dorados went public on the NYSE in April, when it sold 73.5 million shares at $17 each. Today, the stock now trades near $23, after tumbling 10% or so on Thursday and Friday.
The secular growth story in Latin America is impressive. Thanks to the rising popularity of U.S.-style fast food in South America, Arcos Dorados’ annual sales have more than doubled over the past five years. Earnings should do the same between now and 2015. The company already ranks No. 1 in the Latin American fast-food industry, with a market share of 12.4%. And that market share should expand as Arcos Dorados grows in Brazil, Latin America’s biggest market.
Brazil is central to the company’s future success and the Brazilian fast-food market is expected to grow 27% from 2010 to 2014. Although it accounts for only 35% of Arcos Dorados’ 1,767 units, Brazil generates more than half of the company’s $889 million of revenue. Same-restaurant sales growth rose 10.2% for the last quarter — above JP Morgan’s estimates of 8.5%. And Arcos Dorado may double in units in Brazil over the next five years.
The South Latin America Division is the other big chunk of ARCO’s business, accounting for 30% of its revenue, followed by the North Latin America Division, (10%) and Caribbean (8%). The Southern region, which includes Argentina, Venezuela, Colombia, and Chile, grew a whopping 43% on the back of more than 33% comparable-restaurant growth. The Northern region grew revenue 22%, with nearly 10% comparable-restaurant growth. This should improve in the coming quarters as more franchised restaurants come under direct corporate ownership, improving efficiency and operating leverage.
Earlier this month, Arcos Dorados reported second-quarter earnings of 7 cents a share, up from 6 cents during the same quarter of the prior year. Revenue grew 29% year-over-year, in spite of higher costs associated with its initial public offering (IPO) and higher costs tied to the rising prices of food, energy and other commodities. System wide same-restaurant sales increased 14.8%.
So buy Arcos Dorados Holdings Inc. (ARCO) at market today and place your stop at a relatively tight $19.50. I want to make sure that we benefit from a traditional Q4 rally, so I am recommending that you buy the February 2012 $30 calls (ARCO120218C00030000).

Portfolio Update

ProShares Ultra Silver ETF (AGQ) shot up 19.18% last week. A large move like this, alongside a similar move in gold, confirms that silver is playing a “safe-haven” role for investors. Being nowhere near as overbought as gold, silver likely is a somewhat safer play on this fear-based phenomenon. AGQ remains a BUY. Raise your stop to $178.00.
Alliance Resource Partners L.P. (ARLP) lost 3.58% this past week. Although ARLP is falling along with the broader market action, remember that Alliance Resource Partners is paying a hefty 5.20% dividend as we wait for the stock to turnaround. ARLP is still below its 50-day moving average and remains a HOLD.
Bank of Ireland (IRE) gained 2.64% during the past five trading days. Bank of Ireland’s recent earnings report seems to have stabilized IRE’s price level as it largely has been unchanged for two weeks. After recently reporting a peak in loan losses and a reduction in overall 2011 losses, IRE seems to be ripe for a breakout pending better news coming out of Europe. IRE remains a BUY.
National Bank of Greece SA (NBG) fell 5.56%. NBG’s chart is re-testing a $1.00 low it made two weeks ago. A bounce upwards from the $1.00 level will be viewed as a positive sign for this speculative play. NBG is a HOLD.
Toyota Motor Corp. (TM) decreased 4.97% last week. Toyota recently settled an ongoing lawsuit with some of its former U.S. production facility employees. Although a short-term negative, the legal settlement removes one negative mark against TM’s overall health. TM is currently a HOLD.
Proshares Ultra S&P500 (SSO) dropped 9.35% during its first week in the portfolio. This play on a quick market rebound has fallen below its 50-day moving average. Because the market is oversold and I believe we are due for a bounce, I am keeping SSO at a BUY — though I am aware that this contravenes our normal 50-day moving average BUY/HOLD rule of thumb.

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