Have you ever wanted to roll back the clock on a blue-chip company? These two Latin American companies offer you an unparalleled opportunity. And that couldn't be better for investors. Warren Buffett once quipped that all new ideas follow a natural progression characterized by three I's: (1) innovators, (2) imitators, and (3) idiots.
You can probably tell that it is best to be the innovator and worst to be the idiot. The imitator, though, can find itself in a powerful position that allows new markets to be penetrated using a well-known, wildly successful business model. In the case of Arcos Dorados and PriceSmart , it also allows investors to roll back the clock on two extremely successful companies. What more could you ask for?
Growth premium goes BOOM!
Shares of Arcos Dorados lost 40% of their value in 2012 despite being touted as one of the best growth stocks on the market. The McDonald's of Latin America faced a dreadful combination of economic headwinds and weary investors. International currencies go up and down, which is out of the company's control. However, I've always been cautious about paying too much for growth. The bigger the premium investors must pay, the quicker a stock can fall when dark clouds appear on the horizon. That is exactly what happened to Arcos Dorados after flirting with $23 per share last February.
At current prices, it is difficult for investors to ignore the budding potential of a younger McDonald's, especially with the constant stream of numbers being emitted by the company. The quicker a company grows, however, the quicker the numbers change -- making it critical for investors to keep up with in-depth research throughout the year.
Someone pinch me
Knowing this, I was not impressed with the same old numbers that always get thrown around for the company. When, exactly, is the clock being rolled back for investors? I painstakingly combed through historical demographic numbers and McDonald's financial statements to figure it out. The numbers for Arcos Dorados' 2012 are eerily similar to those of McDonald's 40 years ago.
Arcos Dorados 2012
Revenue per store
Source: World Bank, McDonald's.
The one big difference is market cap, which is nearing $3 billion for Arcos Dorados. McDonald's did not reach that value until the end of 1980. And while everyone likes to point out store-count growth, it is also important to consider same-store sales growth, which tends to improve with longevity. Take a look at McDonald's data over the years:
Revenue per store
Arcos Dorados may not be able to globe-hop in the future like McDonald's has done, but it is still on a similar trajectory and controls the reins to the one of the world's least saturated markets. Well-known chain Burger King is well behind in the emerging market, while Yum! Brands pulled out in 2010 to focus elsewhere.
Consider the following: McDonald's has over 14,000 locations in the U.S. alone, or about one restaurant for every 22,000 people. Arcos Dorados has 1,880 locations total, or about one restaurant for every 269,000 people in the countries it serves. This is a rare opportunity to repeat one of the most successful investments ever.
Bulk up with PriceSmart
If your mouth is watering after reading about Arcos Dorados, then you'll also enjoy PriceSmart, the Costco of Latin America that recently crushed first-quarter 2013 earnings. PriceSmart currently operates 30 warehouses and reported revenue of $2.04 billion in fiscal year 2012 -- a figure Costco reached in 1988.
Foolish blogger Simon Erickson performed an in-depth analysis comparing the two last month. He points out the similarities between the two at the 15-year mark and also notes that PriceSmart is taking its time before entering new markets such as Brazil. With the most southern warehouse located in Colombia (the top of South America), what could be in store for investors when the company pushes deeper into the continent?
Watch that premium
PriceSmart, unlike Arcos Dorados, is not currently exposed to volatile currencies such as the Venezuelan bolivar and Brazilian real. But investors should be keeping an eye on the growth premium they must pay at current prices. When Costco notched $2 billion in sales in 1988, it had a market cap of $1.07 billion, much lower than PriceSmart's $2.2 billion at the same watermark.
Looking at the cash flow statement, it doesn't excite me that over half of cash flow from operations is committed to capital expenditures. This makes it very difficult for companies to grow quickly without issuing debt and raises concerns over analyst expecting 20% growth over the next five years. Also, despite revenue growth of 64% since 2009, equity has only risen 9.5% in the same time period. Don't get me wrong, PriceSmart will continue to grow. Just remember what can happen with growth stocks when rain clouds gather (see Arcos Dorados).
Foolish bottom line
Latin America will experience the growing pains of any emerging market, but the purchasing power of hundreds of millions of people will continue to grow for decades to come. That could pay off big for investors focused on the long term. Still, the growth premiums may scare off some investors.
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The article 2 Latin American Growth Stocks With Big Shoes to Fill originally appeared on Fool.com.
Maxx Chatsko has no position in any stocks mentioned. Follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool recommends Burger King Worldwide, Costco Wholesale, McDonald's, and PriceSmart. The Motley Fool owns shares of Arcos Dorados, Costco Wholesale, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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