Four D's Strategy Will Improve Future Customer Experience And Operational Efficiency

Key Takeaways

• The Four D's Strategy and EOTF restaurant expansion are expected to enhance customer experience and operational efficiencies, boosting revenue and margins.
  
• Strong financial health provides flexibility for growth initiatives, positively impacting earnings and shareholder value.
  
• Economic challenges and currency volatility in key markets threaten revenue growth and net margins, while modernization lags may hinder the exploitation of digital sales opportunities.

Catalysts

Operates as a franchisee of McDonald’s restaurants.

• The Four D's Strategy (Digital, Delivery, Drive-Thru, and Development) presents significant forward-looking potential to drive sales and operational efficiencies, likely impacting Arcos Dorados' future revenue and operating margins positively.
  
• The expansion and increased penetration of EOTF (Experience of the Future) restaurants, targeting 90% by 2027, combined with ongoing modernization and openings, are expected to enhance customer experience and operational efficiencies, which can boost revenue and net margins.
  
• The Loyalty Program's expansion is expected to increase customer engagement, frequency, and average check size, contributing to revenue growth and improved net margins.
  
• Continuation and expansion of digital sales, including Mobile App and Delivery channels, are projected to sustain and potentially increase total sales, thereby supporting revenue growth.
  
• Strong financial health, exemplified by a stable balance sheet with no significant debt maturities in the near term and recent favorable debt ratings, provides Arcos Dorados the flexibility to support growth initiatives, which can positively impact earnings and shareholder value.

Arcos Dorados Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arcos Dorados Holdings's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $203.0 million (and earnings per share of $0.91) by about March 2028, up from $148.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 11.5x today. This future PE is lower than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.72%, as per the Simply Wall St company report.

Arcos Dorados Holdings Future Earnings Per Share Growth

Risks

• Economic challenges in key markets, such as the depreciation of the Brazilian real and Mexican peso, pose a risk to U.S. dollar revenue and earnings, despite strong local currency performance.
  
• Inflation and currency volatility in major markets, including a potential continuation of cost pressures from Brazil's beef prices, could negatively impact Food & Paper costs, and therefore, net margins.
  
• The economic situation in Argentina remains fragile, and while there is cautious optimism for recovery, any setbacks in stabilization could impact future earnings from that market.
  
• NOLAD division has yet to modernize its restaurants as extensively as other divisions, potentially affecting its ability to leverage digital and drive-thru sales efficiently, which may impact revenue growth.
  
• Consumer uncertainty due to geopolitical events, particularly in markets like Mexico, could lead to slower consumption growth and affect revenue projections.

Valuation

• The analysts have a consensus price target of $11.306 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 $14.0, and the most bearish reporting a price target of just $8.65.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.5 billion, earnings will come to $203.0 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 13.7%.
  
• Given the current share price of $8.15, the analyst price target of $11.31 is 27.9% 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.