Arcos Dorados: Know This Before Tuesday

The largest operator of McDonald's (NYS: MCD) restaurants in Latin America, Arcos Dorados (NYS: ARCO) , reports earnings Tuesday morning. Here's what you need to know.

The lowdown on Arcos Dorados
For the second quarter, analysts are predicting earnings per share of $0.09. This compares to EPS of $0.07 in the same quarter a year ago and $0.06 from two years ago. In the first quarter of 2012, meanwhile, the company reported EPS of $0.12.

























Source: Arco Dorados Earnings Releases. *Year-over-year percent change on a constant currency basis.

Arcos' performance since going public in April of last year tells a bifurcated tale. As you can see in the table above, the company has been on a spectacular growth streak, increasing both its top-line revenue and same-store sales by double digits over five consecutive quarters. At the same time, however, shares in the fast food giant are down 40% since going public and 37% year-to-date.

Three tailwinds facing the restaurant industry
The second quarter was a challenge for food service companies in general as they battled a stagnant job market, higher commodity costs, and a strong dollar. Chipotle (NYS: CMG) reported disappointing top-line growth and single-digit, same-store sales due to decreasing traffic counts at its stores. Shares in the popular burrito chain promptly lost a quarter of their value.

Four days later, Buffalo Wilds Wings (NAS: BWLD) reported EPS of $0.62, missing the consensus estimate by $0.06 because of an increase in the price of chicken wings. Shares in the company declined nearly 18% over the following week.

Finally, McDonald's reported a 2% decline in EPS for the second quarter, sending the company's shares tumbling, albeit by a comparatively modest 5% in subsequent days. According to its press release, the contraction was caused by a strengthening of the dollar against the euro, as the fast-food giant looks to Europe for 40% of its sales.

Investors are nevertheless bullish on Arcos
Despite these tailwinds, members of our online investing community, CAPS, are extremely bullish on Arcos. They've given it a coveted five-star rating and 98% think it will outperform the market going forward.

There are two principal reasons investors are so optimistic. In the first case, because Arcos has the exclusive rights to own, operate, and grant McDonald's franchises throughout Latin America and the Caribbean, it has a virtually impenetrable moat surrounding it.

In the second case, as Motley Fool blogger Tom Gibbs recently noted, there's epic room for growth in our economically burgeoning southern neighbors. There's one McDonald's for every 22,200 citizens here in the United States. Meanwhile, in Mexico, Costa Rica, and Panama there's one for every 254,000 citizens; in Brazil there's one for every 310,700 citizens; and in the rest of South America, there's one for every 317,400 citizens.

Foolish bottom line
At the end of the day, current and prospective investors in Arcos should be on the lookout for two things when the company reports earnings Tuesday. First, evidence of slackening in same-store sales due to declines in traffic count. And second, pressure on margins due to higher commodity prices courtesy of the drought. Disappointment in either regard will serve as a catalyst for a potentially dramatic decline in share price.

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Fool contributor John Maxfield does not own shares in any of the companies mentioned above.The Motley Fool owns shares of McDonald's, Buffalo Wild Wings, Chipotle Mexican Grill, and Arcos Dorados Holding.Motley Fool newsletter serviceshave recommended buying shares of Chipotle Mexican Grill, McDonald's, and Buffalo Wild Wings.Motley Fool newsletter serviceshave recommended writing covered calls on Buffalo Wild Wings. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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