Digital Initiatives And Loyalty Programs Will Drive Customer Engagement In Latin America's McDonald's Restaurants

Key Takeaways

• Digitalization and loyalty programs are expected to drive sales growth and enhance guest engagement, boosting revenue and potentially improving margins.
  
• Expansion in strong markets and underpenetrated regions aims to leverage competitive advantages and increase ROI, supporting long-term growth and profitability.
  
• Currency devaluation, inflation, and increased costs risk profitability by squeezing margins, while digital and labor changes may challenge operational and net margins in key regions.

Catalysts

Operates as a franchisee of McDonald’s restaurants.

• The ongoing digitalization of operations, including a robust mobile app and digital sales strategies like delivery and drive-thru, is expected to drive sales growth. This expansion of digital channels is likely to impact future revenue positively.
  
• The implementation and expansion of the loyalty program is expected to boost guest engagement and increase sales frequency, which can contribute to higher revenue and potentially improved net margins.
  
• Continued market share gains, especially in strong markets like Brazil, suggest that the company is positioned to leverage its competitive advantage, impacting both future revenue growth and profitability.
  
• The focus on new restaurant openings and modernization, particularly in underpenetrated regions of Latin America, is aimed at reducing operational leverage and potentially increasing ROI, supporting long-term earnings growth.
  
• Strategic hedging and management of currency volatility, as well as a focus on controlling costs like labor and raw materials, are expected to achieve margin improvements, positively impacting future earnings.

Arcos Dorados Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arcos Dorados Holdings's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $218.7 million (and earnings per share of $1.13) by about December 2027, up from $146.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $241 million in earnings, and the most bearish expecting $161.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, up from 10.7x today. This future PE is lower than the current PE for the US Hospitality industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 2.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.41%, as per the Simply Wall St company report.

Arcos Dorados Holdings Future Earnings Per Share Growth

Risks

• Currency devaluations, particularly in Brazil and SLAD regions, impacted profitability and caused a contraction in U.S. dollar EBITDA, squeezing margins and affecting overall earnings.
  
• High inflation in Argentina has been a significant challenge, leading to lower guest counts and contributing to margin pressure in the SLAD division, which could negatively impact net margins.
  
• Increases in food and paper costs, particularly proteins like beef, pose a risk to future profitability in Brazil, potentially leading to tighter margins if consumer price increases are not feasible.
  
• The potential end of favorable labor practices such as the 6x1 labor regime in Brazil could increase labor costs, impacting net margins and operational expenses.
  
• The reliance on digital channels and delivery for sales growth may require continued investment and poses execution risks, which can influence profitability if digital penetration fails to deliver expected results.

Valuation

• The analysts have a consensus price target of $12.48 for Arcos Dorados Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $9.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.6 billion, earnings will come to $218.7 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 13.4%.
• Given the current share price of $7.45, the analyst's price target of $12.48 is 40.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.