Arcos Dorados Holdings (NYSE: ARCO), the largest McDonald's franchisee in Latin America, embarked on its first full week of trading after raising more than $1.25 billion in its rousing initial public offering Thursday.
The stock was trading above $22 a share Monday afternoon after 73.5 million shares debuted at $17 a share with BofA Merrill Lynch, JP Morgan, Morgan Stanley, Itua BBA and Citi leading the offering. The buzz was strong on this one considering the firm originally intended to sell just over 62 million shares at between $13 and $15 a share.
With 1,755 restaurants and exclusive rights in 19 countries and territories following its 2007 acquisition of McDonald's (NYSE: MCD) -- it's still the fast food and real estate giant's largest franchisee and will open at least 250 more stores in the next two years -- Arcos Dorados definitely doesn't appear to be a flash in the French fry fryer.
On Monday, Morningstar weighed in with a glowing appraisement of the head-and-shoulders leader among quick-service restaurants in the burgeoning Latin American market.
"Favorable personal income trends, a flight to urban centers, government-led infrastructure investments, and abundance of natural commodity resources are all conducive to increased consumer spending in Latin American markets, and we're confident that company growth will outpace broader restaurant industry trends," Morningstar analysts wrote in the firm's weekly consumer goods report. "Moreover, with the sizable international appeal of the McDonald's brand, we are optimistic that Arcos Dorados can extend its leading market position in the Latin American quick-service restaurant industry."
Since gobbling up McDonald's Latin operations almost four years ago, the company has opened more than 230 restaurants and 124 McCafe stores throughout the region at a time when total fast food sales in Latin America grew at a compounded annual growth rate of nearly 10% a year.
Moreover, Arcos Dorados' company-operated restaurants garnered roughly $2.2 million per location last year, on par with the McDonald's system average and more than twice the industry's $1 million average.
"Although the company has a limited operating history since acquiring McDonald's operations and real estate in Latin America in August 2007, it has posted solid profitability metrics over the past several years, including restaurant-level margins of 13.6% and adjusted EBITDA margins of 9.9% (excluding one-time and extraordinary items)," the report added.
According to Euromonitor, the Buenos Aires-based firm's accounts for about 12% of Latin American and Caribbean quick-service restaurant sales -- compared to just 3.7% from the next closest competitor, Burger King -- a leadership position Morningstar analysts believe "it is unlikely to cede."
"Based on favorable per capita statistics, regional demographic trends that weigh heavily toward young adults and children, and its favorable competitive position, we believe Arcos Dorados' stock warrants a premium valuation," the report concluded. "In particular, we believe Arcos Dorados' exposure to markets like Argentina, Brazil, Chile, Columbia, and Mexico gives the company greater growth potential than most restaurant operators."
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