Arcos Dorados Holding Inc's "Alice in Wonderland" Share Price Pop

By Alex Dumortier, CFA Markets

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Extraordinary: Shares of Arcos Dorados Holdings rose as much as 27% on Tuesday (they were up 15% at 2 p.m. EDT) after the world's largest McDonald's franchisee announced fourth-quarter earnings per share that fell short of Wall Street's expectations To add insult to injury, the company said it would no longer be providing specific earnings guidance and wait for it it won't declare a dividend in 2015.

So what: Arcos Dorados beat analysts' consensus estimate with regard to revenues, but missed on earnings per share (EPS):


Analysts' Consensus Estimate

Q4 Revenues

$914 million

$903 million

Q4 Adjusted Earnings per Share



Source: Thomson Financial Network, Arcos Dorados.

On top of that, after removing the impact of special items, which "include the impact of events that management does not consider part of the underlying performance of the business," Arcos Dorados actually recorded a loss of ($0.05) per share.

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However, there is much to like about the latest announcement. With regard to guidance, for example, the company will provide longer-term forecasts for a number of metrics. As it said in its press release:

[The] medium to long-term outlook includes comparable sales growth on average, excluding Venezuela, to be in-line with the weighted inflation rate of the other 19 countries in which it operates. The Company also expects to expand its full year Adjusted EBITDA margin by at least 200 to 250 basis points over the next three years.

This is very sensible -- the entire earnings "guessing game" companies and investors play is an enormous waste of energy and a distraction from assessing the potential for long-term value creation.

On the dividend, Arcos Dorados defended the decision not to declare one in 2015 on the basis that it is "focused on increasing free cash flow generation, reducing leverage and pursuing a financially disciplined approach to capital allocation in order to significantly enhance shareholder value." Eliminating the dividend is a difficult decision, but the company appears to be willing to play the "long game" and I applaud it for it.

Now what: By Wall Street's standards, Arcos Dorados committed several cardinal sins today, but I think it is showing a high regard for investors genuine, long-term investors, that is. Furthermore, at just 6 times cash flow, the shares do not appear expensive; in an environment that presents few bargains, they may be worth a look now.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Arcos Dorados. 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.