McDonald’s (NYSE: MCD) is a great stock, but investing in MCD directly isn't the only way to buy into its success. With Arcos Dorados (NYSE: ARCO), you can get MCD exposure for cheaper and with a more robust growth outlook.

Arcos Dorados is the brand's largest independent franchise operator and restaurant chain in Latin America, leading with growth and accelerating its store openings. Surely, it comes with risks, but those are offset by the company’s health and the brand it represents, which is well-established, trusted worldwide, and growing.

ARCO stock trades at a deep value to McDonald’s -- near 10x this year’s earnings outlook and 10.5x next year’s with an outlook for accelerating results. McDonald’s trades more than double the valuation at 22x this year and 20.5x next year’s earnings consensus, and its business is growing at half the pace. 

The MCD dividend is a bit better than ARCO; the yield is worth 70 basis points more annually, but it has a less robust outlook for distribution growth. McDonald’s is unlikely to curb distribution increases or cut them out, but its 55% payout ratio is far higher. The takeaway is that Arcos Dorados' dividend may not match up to MCD now, but it will over time, and that is another value driver for shareholders. 

Arcos Dorados Had a Robust Quarter, Gives Positive Outlook

Arcos Dorados had a robust quarter in Q1, with strength in all regions and segments. The company reported $1.1 billion in net sales for a gain of 9.1%, nearly double the 4.6% pace set by the parent company. The growth is driven by a 38.6% systemwide comp due partly to inflation. Inflation is raging throughout Latin America, but company growth is outpacing it significantly, more than 2x on average, as volume growth continues. Volume growth trends are supported by the push into markets outside Brazil, including deepening penetration of existing markets. It has been positive for 12 quarters. 

Internal metrics are good. The company’s three-D strategy of Digital, Drive-thru, and Delivery is paying off. Digital sales amounted to 55% of the revenue and are supported by the lean into freestanding units. Freestanding units provide the fullest MCD experience, which centers on the Drive-thru. Loyalty membership is another strength, more than doubling compared to the prior year. 

The company maintained its margin despite the push of inflation. Consolidated adjusted EBITDA growth trailed the top line slightly at 8.4% but is still solid. The net result is a GAAP income of 14 cents, a penny below the consensus and down compared to last year but aligning with dividend health. The company gave no specific guidance but said demand is solid across the footprint. The results in Q1 led them to accelerate plans for store openings, which stand at 22 new stores so far for this year. 

Among the positive developments during the quarter is the sponsorship of Formula One in Latin America. The sport resonates with families across all boundaries and should aid brand awareness and growth over the next few years. 

Analysts See Upside for Arcos Dorados

Analysts' activity in Arcos Dorados is light but bullish: the coverage of MCD is more robust and bullish and includes the impact of Arcos Dorados. The four analysts tracked by Marketbeat.com covering ARCO are pegged at Buy/Outperform with a consensus price target of $13.38. That is 25% above the current action, suggesting a deep value opportunity. Because the stock trades below the analyst's lowest price target, it should rebound from its current lows soon.

The stock is down following the Q1 release but shows signs of support near the recent low. A rebound could form within days if the market sustains support at this level. If not, this stock could fall to new lows, which is unexpected. Deepening the penetration of markets with growing markets is a recipe for persistent growth, even with headwinds in place, and that should support higher price action and the long-term trend in this stock.