Intrinsic value of Arcos Dorados Holdings Inc. - ARCO

Previous Close

$6.25

  Intrinsic Value

$44.59

stock screener

  Rating & Target

str. buy

+613%

Previous close

$6.25

 
Intrinsic value

$44.59

 
Up/down potential

+613%

 
Rating

str. buy

We calculate the intrinsic value of ARCO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  13.40
  12.56
  11.80
  11.12
  10.51
  9.96
  9.46
  9.02
  8.62
  8.25
  7.93
  7.64
  7.37
  7.14
  6.92
  6.73
  6.56
  6.40
  6.26
  6.13
  6.02
  5.92
  5.83
  5.74
  5.67
  5.60
  5.54
  5.49
  5.44
  5.40
Revenue, $m
  3,765
  4,238
  4,738
  5,265
  5,818
  6,398
  7,003
  7,635
  8,293
  8,977
  9,689
  10,429
  11,198
  11,997
  12,827
  13,690
  14,588
  15,522
  16,494
  17,505
  18,560
  19,658
  20,804
  21,999
  23,246
  24,548
  25,909
  27,331
  28,818
  30,373
Variable operating expenses, $m
  2,853
  3,211
  3,589
  3,988
  4,407
  4,845
  5,303
  5,781
  6,279
  6,797
  7,330
  7,890
  8,472
  9,076
  9,705
  10,358
  11,037
  11,743
  12,478
  13,244
  14,041
  14,872
  15,739
  16,643
  17,587
  18,572
  19,602
  20,677
  21,802
  22,979
Fixed operating expenses, $m
  555
  567
  580
  592
  605
  619
  632
  646
  660
  675
  690
  705
  721
  736
  753
  769
  786
  803
  821
  839
  858
  876
  896
  915
  936
  956
  977
  999
  1,021
  1,043
Total operating expenses, $m
  3,408
  3,778
  4,169
  4,580
  5,012
  5,464
  5,935
  6,427
  6,939
  7,472
  8,020
  8,595
  9,193
  9,812
  10,458
  11,127
  11,823
  12,546
  13,299
  14,083
  14,899
  15,748
  16,635
  17,558
  18,523
  19,528
  20,579
  21,676
  22,823
  24,022
Operating income, $m
  357
  460
  569
  685
  806
  934
  1,068
  1,208
  1,354
  1,506
  1,669
  1,834
  2,006
  2,184
  2,370
  2,564
  2,765
  2,975
  3,194
  3,423
  3,661
  3,909
  4,169
  4,440
  4,724
  5,020
  5,330
  5,655
  5,995
  6,351
EBITDA, $m
  472
  588
  712
  843
  981
  1,126
  1,277
  1,436
  1,601
  1,773
  1,952
  2,139
  2,333
  2,535
  2,745
  2,964
  3,192
  3,429
  3,677
  3,934
  4,203
  4,484
  4,777
  5,083
  5,403
  5,738
  6,088
  6,454
  6,838
  7,239
Interest expense (income), $m
  77
  71
  90
  110
  131
  154
  177
  202
  227
  254
  282
  311
  342
  373
  406
  440
  475
  512
  550
  590
  631
  674
  719
  766
  814
  865
  918
  974
  1,032
  1,092
  1,155
Earnings before tax, $m
  286
  370
  459
  553
  653
  757
  866
  980
  1,099
  1,223
  1,357
  1,492
  1,632
  1,778
  1,930
  2,089
  2,253
  2,425
  2,604
  2,791
  2,987
  3,190
  3,403
  3,626
  3,858
  4,102
  4,357
  4,623
  4,903
  5,196
Tax expense, $m
  77
  100
  124
  149
  176
  204
  234
  265
  297
  330
  367
  403
  441
  480
  521
  564
  608
  655
  703
  754
  806
  861
  919
  979
  1,042
  1,107
  1,176
  1,248
  1,324
  1,403
Net income, $m
  209
  270
  335
  404
  476
  553
  632
  716
  802
  893
  991
  1,089
  1,192
  1,298
  1,409
  1,525
  1,645
  1,770
  1,901
  2,038
  2,180
  2,329
  2,484
  2,647
  2,817
  2,994
  3,180
  3,375
  3,579
  3,793

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,045
  2,302
  2,574
  2,860
  3,160
  3,475
  3,804
  4,147
  4,505
  4,876
  5,263
  5,665
  6,083
  6,516
  6,968
  7,436
  7,924
  8,431
  8,959
  9,509
  10,081
  10,678
  11,300
  11,949
  12,627
  13,334
  14,073
  14,846
  15,653
  16,498
Adjusted assets (=assets-cash), $m
  2,045
  2,302
  2,574
  2,860
  3,160
  3,475
  3,804
  4,147
  4,505
  4,876
  5,263
  5,665
  6,083
  6,516
  6,968
  7,436
  7,924
  8,431
  8,959
  9,509
  10,081
  10,678
  11,300
  11,949
  12,627
  13,334
  14,073
  14,846
  15,653
  16,498
Revenue / Adjusted assets
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
  1.841
Average production assets, $m
  1,013
  1,140
  1,275
  1,416
  1,565
  1,721
  1,884
  2,054
  2,231
  2,415
  2,606
  2,805
  3,012
  3,227
  3,451
  3,683
  3,924
  4,175
  4,437
  4,709
  4,993
  5,288
  5,596
  5,918
  6,253
  6,604
  6,970
  7,352
  7,752
  8,170
Working capital, $m
  -297
  -335
  -374
  -416
  -460
  -505
  -553
  -603
  -655
  -709
  -765
  -824
  -885
  -948
  -1,013
  -1,082
  -1,152
  -1,226
  -1,303
  -1,383
  -1,466
  -1,553
  -1,643
  -1,738
  -1,836
  -1,939
  -2,047
  -2,159
  -2,277
  -2,399
Total debt, $m
  831
  1,017
  1,214
  1,422
  1,640
  1,868
  2,106
  2,355
  2,614
  2,884
  3,164
  3,455
  3,758
  4,073
  4,400
  4,740
  5,093
  5,461
  5,844
  6,242
  6,657
  7,090
  7,541
  8,012
  8,503
  9,016
  9,552
  10,112
  10,697
  11,309
Total liabilities, $m
  1,483
  1,669
  1,866
  2,073
  2,291
  2,520
  2,758
  3,007
  3,266
  3,535
  3,816
  4,107
  4,410
  4,724
  5,051
  5,391
  5,745
  6,113
  6,495
  6,894
  7,309
  7,742
  8,193
  8,663
  9,154
  9,667
  10,203
  10,763
  11,349
  11,961
Total equity, $m
  562
  633
  708
  786
  869
  956
  1,046
  1,140
  1,239
  1,341
  1,447
  1,558
  1,673
  1,792
  1,916
  2,045
  2,179
  2,319
  2,464
  2,615
  2,772
  2,936
  3,108
  3,286
  3,472
  3,667
  3,870
  4,083
  4,305
  4,537
Total liabilities and equity, $m
  2,045
  2,302
  2,574
  2,859
  3,160
  3,476
  3,804
  4,147
  4,505
  4,876
  5,263
  5,665
  6,083
  6,516
  6,967
  7,436
  7,924
  8,432
  8,959
  9,509
  10,081
  10,678
  11,301
  11,949
  12,626
  13,334
  14,073
  14,846
  15,654
  16,498
Debt-to-equity ratio
  1.480
  1.610
  1.720
  1.810
  1.890
  1.950
  2.010
  2.070
  2.110
  2.150
  2.190
  2.220
  2.250
  2.270
  2.300
  2.320
  2.340
  2.360
  2.370
  2.390
  2.400
  2.410
  2.430
  2.440
  2.450
  2.460
  2.470
  2.480
  2.490
  2.490
Adjusted equity ratio
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275
  0.275

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  209
  270
  335
  404
  476
  553
  632
  716
  802
  893
  991
  1,089
  1,192
  1,298
  1,409
  1,525
  1,645
  1,770
  1,901
  2,038
  2,180
  2,329
  2,484
  2,647
  2,817
  2,994
  3,180
  3,375
  3,579
  3,793
Depreciation, amort., depletion, $m
  115
  129
  143
  159
  175
  192
  210
  228
  247
  267
  283
  305
  327
  351
  375
  400
  427
  454
  482
  512
  543
  575
  608
  643
  680
  718
  758
  799
  843
  888
Funds from operations, $m
  324
  399
  479
  563
  651
  744
  842
  944
  1,050
  1,160
  1,274
  1,394
  1,519
  1,649
  1,784
  1,925
  2,072
  2,224
  2,384
  2,550
  2,723
  2,904
  3,093
  3,290
  3,496
  3,712
  3,938
  4,174
  4,422
  4,681
Change in working capital, $m
  -35
  -37
  -40
  -42
  -44
  -46
  -48
  -50
  -52
  -54
  -56
  -58
  -61
  -63
  -66
  -68
  -71
  -74
  -77
  -80
  -83
  -87
  -90
  -94
  -99
  -103
  -107
  -112
  -117
  -123
Cash from operations, $m
  359
  436
  518
  604
  695
  790
  890
  993
  1,102
  1,214
  1,330
  1,453
  1,580
  1,712
  1,850
  1,993
  2,142
  2,298
  2,460
  2,630
  2,806
  2,990
  3,183
  3,384
  3,595
  3,815
  4,045
  4,287
  4,539
  4,804
Maintenance CAPEX, $m
  -97
  -110
  -124
  -139
  -154
  -170
  -187
  -205
  -223
  -242
  -262
  -283
  -305
  -327
  -351
  -375
  -400
  -427
  -454
  -482
  -512
  -543
  -575
  -608
  -643
  -680
  -718
  -758
  -799
  -843
New CAPEX, $m
  -121
  -127
  -135
  -142
  -149
  -156
  -163
  -170
  -177
  -184
  -191
  -199
  -207
  -215
  -223
  -232
  -241
  -251
  -261
  -272
  -284
  -296
  -308
  -321
  -336
  -350
  -366
  -383
  -400
  -418
Cash from investing activities, $m
  -218
  -237
  -259
  -281
  -303
  -326
  -350
  -375
  -400
  -426
  -453
  -482
  -512
  -542
  -574
  -607
  -641
  -678
  -715
  -754
  -796
  -839
  -883
  -929
  -979
  -1,030
  -1,084
  -1,141
  -1,199
  -1,261
Free cash flow, $m
  141
  199
  260
  324
  392
  464
  540
  619
  701
  788
  877
  970
  1,068
  1,170
  1,276
  1,386
  1,501
  1,620
  1,745
  1,875
  2,011
  2,152
  2,300
  2,455
  2,616
  2,785
  2,962
  3,146
  3,340
  3,543
Issuance/(repayment) of debt, $m
  175
  186
  197
  208
  218
  228
  238
  249
  259
  270
  280
  291
  303
  315
  327
  340
  353
  368
  383
  398
  415
  433
  451
  471
  491
  513
  536
  560
  585
  612
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  175
  186
  197
  208
  218
  228
  238
  249
  259
  270
  280
  291
  303
  315
  327
  340
  353
  368
  383
  398
  415
  433
  451
  471
  491
  513
  536
  560
  585
  612
Total cash flow (excl. dividends), $m
  316
  385
  457
  532
  610
  692
  778
  867
  961
  1,057
  1,157
  1,262
  1,371
  1,484
  1,603
  1,726
  1,854
  1,988
  2,128
  2,274
  2,426
  2,585
  2,751
  2,925
  3,107
  3,298
  3,497
  3,706
  3,926
  4,155
Retained Cash Flow (-), $m
  -67
  -71
  -75
  -79
  -83
  -87
  -90
  -94
  -98
  -102
  -106
  -111
  -115
  -119
  -124
  -129
  -134
  -139
  -145
  -151
  -157
  -164
  -171
  -179
  -186
  -195
  -203
  -212
  -222
  -232
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  249
  314
  382
  453
  528
  606
  688
  773
  862
  955
  1,051
  1,151
  1,256
  1,365
  1,479
  1,597
  1,720
  1,849
  1,983
  2,122
  2,268
  2,421
  2,580
  2,747
  2,921
  3,103
  3,294
  3,494
  3,703
  3,923
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  239
  288
  332
  373
  409
  440
  465
  483
  495
  501
  499
  491
  478
  458
  434
  406
  374
  340
  305
  270
  235
  201
  169
  140
  114
  91
  71
  54
  40
  30
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Arcos Dorados Holdings Inc. is a McDonald's franchisee. The Company operates or franchises over 2,140 McDonald's-branded restaurants. It divides its operations into four geographical divisions: Brazil; the Caribbean division, consisting of Aruba, Colombia, Curacao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the United States Virgin Islands of Saint Croix and Saint Thomas, and Venezuela; the North Latin America division (NOLAD), consisting of Costa Rica, Mexico and Panama, and the South Latin America division (SLAD), consisting of Argentina, Chile, Ecuador, Peru and Uruguay. Its menus feature over three tiers of products: entry-level options, such as its Big Pleasures, Small Prices offerings and Almuerzos Colombianos (Colombian Lunches) in Colombia; core menu options, such as the Big Mac, Happy Meal and Quarter Pounder, and premium options, such as Big Tasty or Angus premium hamburgers and chicken sandwiches and low-calorie or low-sodium products.

FINANCIAL RATIOS  of  Arcos Dorados Holdings Inc. (ARCO)

Valuation Ratios
P/E Ratio 16.7
Price to Sales 0.4
Price to Book 3.8
Price to Tangible Book
Price to Cash Flow 8
Price to Free Cash Flow 18.3
Growth Rates
Sales Growth Rate -4.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 1.1%
Cap. Spend. - 3 Yr. Gr. Rate -21.7%
Financial Strength
Quick Ratio 7
Current Ratio 0
LT Debt to Equity 157.3%
Total Debt to Equity 165.2%
Interest Coverage 3
Management Effectiveness
Return On Assets 8.4%
Ret/ On Assets - 3 Yr. Avg. 3.9%
Return On Total Capital 8.4%
Ret/ On T. Cap. - 3 Yr. Avg. -1.4%
Return On Equity 24.8%
Return On Equity - 3 Yr. Avg. -2.7%
Asset Turnover 2
Profitability Ratios
Gross Margin 12.2%
Gross Margin - 3 Yr. Avg. 12%
EBITDA Margin 10.5%
EBITDA Margin - 3 Yr. Avg. 6.1%
Operating Margin 6.1%
Oper. Margin - 3 Yr. Avg. 3.7%
Pre-Tax Margin 4.7%
Pre-Tax Margin - 3 Yr. Avg. 0.6%
Net Profit Margin 2.7%
Net Profit Margin - 3 Yr. Avg. -0.7%
Effective Tax Rate 43.2%
Eff/ Tax Rate - 3 Yr. Avg. -24.8%
Payout Ratio 0%

ARCO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ARCO stock intrinsic value calculation we used $3320 million for the last fiscal year's total revenue generated by Arcos Dorados Holdings Inc.. The default revenue input number comes from 0001 income statement of Arcos Dorados Holdings Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ARCO stock valuation model: a) initial revenue growth rate of 13.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ARCO is calculated based on our internal credit rating of Arcos Dorados Holdings Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Arcos Dorados Holdings Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ARCO stock the variable cost ratio is equal to 75.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $543 million in the base year in the intrinsic value calculation for ARCO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 10.8% for Arcos Dorados Holdings Inc..

Corporate tax rate of 27% is the nominal tax rate for Arcos Dorados Holdings Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ARCO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ARCO are equal to 26.9%.

Life of production assets of 9.2 years is the average useful life of capital assets used in Arcos Dorados Holdings Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ARCO is equal to -7.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $495.65 million for Arcos Dorados Holdings Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 208.232 million for Arcos Dorados Holdings Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Arcos Dorados Holdings Inc. at the current share price and the inputted number of shares is $1.3 billion.

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