We recently published a list of 11 Best Fast Food Stocks To Invest In Right Now. In this article, we are going to take a look at where Arcos Dorados Holdings Inc. (NYSE:ARCO) stands against other best fast food stocks.
Fast food is integral to American culture and remains popular among adults and children. According to a report by the CDC, one-third of Americans consume fast food every day, while 83% of the country's families dine out at a fast food restaurant at least once a week. Around 45% of the population aged between 20-39 consume fast food every day, while the indulgence rate of those between 40-59 years of age is slightly lower at 37.7%. On the other hand, 34% of children regularly eat fast food daily.
However, an increasing number of Americans are beginning to pull down on their consumption and eating less fast food per week due to high prices. A survey by Lending Tree in May 2024 highlighted that about 78% of the citizens consider fast food a ‘luxury’ after rampant inflation in the country has forced Americans to reassess their spending habits. Surge pricing in restaurants has also added to their worries, with about 72% confessing that they would prefer having fast food during discount hours.
Over the past year, menu prices have risen considerably in the US across the wider restaurant industry, driven by increased commodity and supply chain costs. This has boosted consumer desire in the country to eat at home. Carnegie Investment Counsel’s portfolio manager, Razmig Pounardjian, stated the following to Reuters in May:
"The lack of value offers has opened up consumers to shop for different options whether it be other (chains) or the grocery stores."
Despite challenges, the American restaurant industry remains resilient, primarily because it adapts well to changing consumer habits. The National Restaurant Association has forecast sales to top the $1 trillion mark in 2024 for the first time. It also expects the industry to create 200,000 new jobs, citing what is generally a strong demand from Americans to eat at restaurants.
A restaurant ETF issued by AdvisorShares, which invests exclusively in the restaurant and food industry has gained 18.32% YTD, outperforming the broader market by over six percentage points, as of the close of October 31. The Fed rate cuts will likely help restaurant stocks as they would to the broader market. The low cost of borrowing will boost consumer spending and ease the burden on restaurant owners, allowing them to go ahead with their expansion plans.
In September this year, the Federal Reserve announced a 50-basis point rate cut – the first since March 2020 – to lower the range of interest rates from 4.75% to 5%. Details emerging from the minutes of the September meeting disclosed a ‘substantial majority’ of central bankers backing the cut, which has raised optimism among investors for further cuts ahead in the November meeting.
Another encouraging recent trend has been the downturn in the country's inflation, which dropped to 2.4% in September and is inching toward the Federal Reserve’s goal of a two percent annual rate.
A close-up of customers ordering from a McDonald's restaurant in Latin America.
Our Methodology
We used Finviz's restaurant industry screener to sample stocks for this article and then identified the companies that dealt with fast food. Among them, we picked the top 11 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Arcos Dorados Holdings Inc. (NYSE:ARCO) is a McDonald’s franchisee that operates over 2,140 restaurants in four geographical divisions: Brazil, the Caribbean, North Latin America, and South Latin America.
The company reported a robust performance during the second quarter of 2024, with revenue increasing 6.8% on a YoY basis, driven by significant growth in the restaurant chain’s digital and off-premise channels. Guest traffic expanded for the 13th successive quarter, contributing to Arcos Dorados Holdings Inc. (NYSE:ARCO)’s sales growth.
The company’s quest for digitalization is yielding impressive returns and has become a major catalyst for its growth. Digital sales grew 24% year-over-year and represented 57% of systemwide sales, with Brazil leading the digitalization, having a digital sales penetration rate of 67% during the quarter. The ongoing digital transformation also produced strong results in the South Latin America Division, where digital channel sales grew between 25% and 50% in Chile, Colombia, Ecuador, and Uruguay.
Delivery and drive-thru sales in the off-premise channel surged 11% compared to last year and accounted for 45% of system-wide sales in Q2. Delivery sales were particularly strong in Brazil, Colombia, Costa Rica, Mexico, and Uruguay, growing between 25% and 45%. The company’s loyalty program launched in Brazil, Costa Rica, and Uruguay has been a success as well, registering around 11 million members by the end of July.
In October this year, Arcos Dorados Holdings Inc. (NYSE:ARCO) announced that it would exercise its option to renew the Master Franchise Agreement (MFA) with McDonald’s for another 20 years. The agreement, which will run from 2025 to 2045, is expected to include a royalty of gross sales of 6% for the first 10 years, 6.25% for the following 5 years, and 6.5% for the final five years of the agreement.
The renewed MFA represents a significant opportunity for future growth. Wall Street analysts have a consensus Buy rating on Arcos Dorados Holdings Inc. (NYSE:ARCO), with a median share price upside potential of 70%. Hedge fund sentiment on the stock remains bullish as well. According to Insider Monkey’s database for Q2 2024, 19 hedge funds had investments in the company, up from 14 at the end of the first quarter. Arcos Dorados Holdings Inc. (NYSE:ARCO) is one of the best fast food stocks to invest in right now.
Overall, ARCO ranks 10th among the 11 best fast food stocks to invest in right now. While we acknowledge the potential of fast food companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ARCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
