Quick service restaurant (QSR) chain Arcos Dorados Holdings Inc. (ARCO) is the world’s largest independent McDonald’s franchisee operating in Latin America and the Caribbean. The Montevideo, Uruguay-based company operates almost 2,300 restaurants.

Despite the uncertain macroeconomic environment, ARCO’s EPS and revenue came higher than analyst estimates in the third quarter. Its EPS beat the consensus estimate by 103.1%, while its revenue came 2.7% higher than analyst estimates.

The company’s systemwide comparable sales rose 34.2% year-over-year in the third quarter, and its digital channels, which include Delivery, Mobile App, and Self-order kiosks, contributed to 42% of systemwide sales. Also, Gross restaurant openings came in at 15 in the third quarter, including 14 freestanding units and nine restaurants in Brazil.

The company’s net debt to adjusted EBITDA leverage ratio in the third quarter came in at a historical low of 1.0x as strong cash flows and record trailing-12-month adjusted EBITDA offset the rise in debt, and lower value of Brazilian-real linked derivative instruments compared with December 31, 2021.

In the first nine months of fiscal 2022, ARCO opened 45 new restaurants, including 40 freestanding units. At the end of September 30, 2022, the total number of restaurants stood at 2,297. For fiscal 2022, the company expects to open ~65 restaurants with ~90% freestanding.

ARCO’s stock has gained 30.5% in price over the past six months and 55.5% over the past year to close the last trading session at $8.69.

Here’s what could influence ARCO’s performance in the upcoming months:

Robust Financials

ARCO’s total revenues increased 27% year-over-year to $921.70 million for the third quarter ended September 30, 2022. Its net income attributable to ARCO increased 89.7% year-over-year to $46.87 million. The company’s adjusted EBITDA rose 15% from the prior-year quarter to $102.65 million. Also, its EPS came in at $0.23, representing an increase of 91.7% year-over-year.

Revenue and EPS Growth Estimates

Analysts expect ARCO’s EPS for fiscal 2022 and 2023 to increase 141.4% and 22.1% year-over-year to $0.53 and $0.65. Its revenue for fiscal 2022 and 2023 is expected to increase 32.2% and 5.1% year-over-year to $3.52 billion and $3.70 billion. It surpassed the Street EPS estimates in three of the trailing four quarters.

Discounted Valuation

ARCO’s forward non-GAAP PEG of 0.86x is 38.7% lower than the 1.40x industry average. Its forward EV/EBITDA of 8.25x is 16.8% lower than the 9.92x industry average. Also, the stock's 13.02x forward EV/EBIT is 3.4% lower than the 13.49x industry average.

Mixed Profitability

In terms of the trailing-12-month EBITDA margin, ARCO’s 10.94% is 1.3% lower than the 11.09% industry average. Its 13.91% trailing-12-month gross profit margin is 60.9% lower than the 35.58% industry average.

On the other hand, its 3.33% trailing-12-month levered FCF margin is 147.4% higher than the industry average of 1.35%. In addition, its 1.44% trailing-12-month asset turnover ratio is 42.2% higher than the industry average of 1.01% industry average.

POWR Ratings Show Promise

ARCO has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ARCO has an A grade for Value, in sync with its discounted valuation.

It has an A grade for Sentiment, consistent with its favorable analyst estimates.

ARCO is ranked #5 out of 46 stocks in the B-rated Restaurants industry.

Bottom Line

ARCO’s stock is trading above its 50-day and 200-day moving averages of $7.76 and $7.41, respectively, indicating an uptrend. With the company opening more restaurants, it will capture the rising consumer demand, given the popularity of the McDonald’s brand. Its digital channels are recording strong sales growth. With the company focusing on digital orders, it is expected to grow its revenue further in the long term.

So, given its robust financials, favorable analyst estimates, and discounted valuation, it could be wise to buy the stock now.

How Does Arcos Dorados Holdings Inc. (ARCO) Stack up Against Its Peers?

ARCO has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Restaurants industry with an A (Strong Buy) rating: Nathan's Famous, Inc. (NATH), Biglari Holdings Inc. (BH), and Ark Restaurants Corp. (ARKR).

ARCO shares were trading at $8.97 per share on Tuesday morning, up $0.28 (+3.22%). Year-to-date, ARCO has gained 7.30%, versus a 4.64% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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