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A McDonald's Franchisee

February 27, 2014 | About:

Arcos Dorados Holdings (ARCO) is the largest McDonald's franchise in the world in terms of system-wide sales and number of restaurants. The company represents about 6.7% of McDonald's franchised restaurants globally. Is the largest operator of McDonald's restaurants in Latin America and the Caribbean. Arcos has more than 94,000 employes throughout Latin America and the Caribbean. It serves more than 4.3 million customers daily and is the largest Quick and Service Restaurant Chain (QSR) in Latin America and the Caribbean. Arcos operates in over 20 countries and territories throughout Latin America and the Caribbean.

Company History & Operations

The company was formed in 2007, as a result of the aquistion of McDonald's Latin America business by the region's operation managers. It operates its McDonald's restaurant under two structures: company-operated restaurants and franchised restaurants. They own, manage and operates about 75% of its restaurants. The remaining 25% of restaurants are operated by franchisees. In 1999 McDonald's launched the McCafe concept to attract new customers, particularly during breakfast and after lunch. There McCafe is seperated within the restaurant where customers can buy latters, cappcuccinos, mochas, hot and iced premium coffees. There are over 334 McCafes locations throughout Latin America.

Valuation

Balance Sheet

Period Ending: 2012

31/12

2011

31/12

2010

31/12

2009

31/12

Total Current Assets 601.5 588.61 552.36 394.01
Cash and Short Term Investments 184.85 176.3 208.1 167.97
Cash - - - -
Cash & Equivalents 184.85 176.3 208.1 167.97
Short Term Investments - - - -
Total Receivables, Net 236.77 160.47 186.88 118.67
Accounts Receivables - Trade, Net 96.08 83.51 72.72 56.92
Total Inventory 54.82 50.73 66.43 50.55
Prepaid Expenses 86.25 129.55 73.47 35.54
Other Current Assets, Total 38.81 71.56 17.48 21.29
Total Assets 2049.16 1875.41 1784.27 1482.95
Property/Plant/Equipment, Total - Net 1176.35 1023.18 911.73 785.86
Property/Plant/Equipment, Total - Gross 1457.46 1227.75 1075.35 900.74
Accumulated Depreciation, Total -281.11 -204.57 -163.62 -114.88
Goodwill, Net 18.18 17.75 17.54 15.53
Intangibles, Net 49.09 40.66 29.72 21.87
Long Term Investments - - - -
Note Receivable - Long Term - - - -
Other Long Term Assets, Total 204.04 205.19 272.92 265.67
Other Assets, Total - - - -
Total Current Liabilities 578.27 589.29 605.15 396.81
Accounts Payable 273.64 239.94 202.89 135.54
Payable/Accrued - - - -
Accrued Expenses 149.97 136.31 190.62 133.29
Notes Payable/Short Term Debt 0.57 0.84 11.74 6.7
Current Port. of LT Debt/Capital Leases 1.63 2.97 6.21 4.35
Other Current liabilities, Total 152.46 209.23 193.69 116.93
Total Liabilities 1304.02 1196.79 1236.46 1030.29
Total Long Term Debt 646.14 522.98 451.42 454.46
Long Term Debt 637.02 517.81 451.42 454.46
Capital Lease Obligations 9.12 5.17 - -
Total Debt 648.35 526.79 469.37 465.51
Deferred Income Tax 9.01 4.65 6.38 0.77
Minority Interest 1.17 1.01 1.39 1.39
Other Liabilities, Total 69.43 78.86 172.12 176.86
Total Equity 745.14 678.62 547.8 452.65
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non Redeemable, Net - - - -
Common Stock, Total 484.57 484.57 377.55 377.55
Additional Paid-In Capital 18.63 5.73 -2.47 -2.47
Retained Earnings (Accumulated Deficit) 400.76 336.71 271.39 205.37
Treasury Stock - Common - - - -
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) - - - -
Other Equity, Total -158.82 -148.39 -98.66 -127.79
Total Liabilities & Shareholders' Equity 2049.16 1875.41 1784.27 1482.95
Total Common Shares Outstanding 209.53 209.53 200 200
Total Preferred Shares Outstanding - - - -

Cash Flow Statements

2012

31/12

2011

31/12

2010

31/12

2009

31/12

Period Length: 12 Months 12 Months 12 Months 12 Months
Net Income/Starting Line 114.33 115.53 106.02 80.02
Cash From Operating Activities 230.11 261.62 263.88 148.02
Depreciation/Depletion 92.33 68.97 60.59 54.17
Amortization - - - -
Deferred Taxes 14.23 -2.88 -61.1 -49.83
Non-Cash Items 25.4 71.88 99.71 41.22
Cash Receipts - - - -
Cash Payments - - - -
Cash Taxes Paid 30.7 50.95 40.39 63.7
Cash Interest Paid 55.35 46.02 42.03 26.01
Changes in Working Capital -16.18 8.12 58.66 22.45
Cash From Investing Activities -306.42 -320.13 -178.22 -96.37
Capital Expenditures -294.48 -319.86 -175.67 -90.11
Other Investing Cash Flow Items, Total -11.94 -0.27 -2.56 -6.26
Cash From Financing Activities 90.65 35.67 -51.29 24.37
Financing Cash Flow Items -8.82 -152.21 -21.69 -419.2
Total Cash Dividends Paid -50.04 -56.63 -33.4 -
Issuance (Retirement) of Stock, Net - 152.28 - -
Issuance (Retirement) of Debt, Net 149.5 92.23 3.81 443.57
Foreign Exchange Effects -5.79 -8.96 5.76 -14.03
Net Change in Cash 8.55 -31.8 40.12 61.99

Compared Value to Top Competitors

COMPS EV / EBIT EBIT margin EV / SALES
Yum Brands (YUM) (5 years 3%) 16.95 17.80% 2.65
McDonalds (MCD) (5 years 3.6%) 12.10 30.00% 3.85
Chipotle Mexican Grill (CMG) (5 years 20%) 31.88 16.80% 5.28
Arcos Dorados (ARCO) (5 years 9.12%) 10.19 6.62% 0.64
Average (ex. ARCO) 20.31 21.53% 3.93
Industry average 20.38 15.80% 2.50

Compared to other companies in the industry, Arco is undervalued and should return a clear profit. Based on its cash flow statements, its fair share value is $2.578 billion compared to the market value of $1.83 billion. With EUR$338 million in cash on the balance sheet and an enterprise value double the market value there is no reason not to buy its stock.

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