Arcos Dorados Holdings Inc. (ARCO): what the price assumes

boothcheck covers Arcos Dorados Holdings Inc. (ARCO) but does not put one priced-in number on it: here the defensible answer is the evidence rather than a point estimate. boothcheck publishes no house fair value, target price, or buy/sell rating. Narrative composed 2026-07-25.

Generated: 2026-08-31 · Source: https://boothcheck.com/report/ARCO

Headline

What The Price Assumes (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

The operating-margin figure is value-band context at year 12: derived from the framework's value band, a separate calculation — not part of the priced-in solve.

The price sits below what even a 5%/yr operating-profit decline would warrant; the inversion reports a bound, not a solved growth path.

Solve inputs: computed at a 7% cost of capital with 4% terminal growth over a 5-year stage (computed at the 7% minimum rate; the CAPM rate 4.8% sits below it).

How unusual the bet is: n/a

Valuation X-Ray

The price is supported by asset-based and earnings-power and relative-multiple and growth-DCF value. A value/asset-supported name, not a pure growth bet.

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

Families that justify the price: Asset, Earnings, Relative, Growth

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 4.2%); the inversion above states its own rate.

Per-Model Detail (n=16)

Solvency

Bullet Takeaways

• Arcos Dorados runs the restaurants rather than licensing them out, with company-operated locations supplying 95% of revenue, and it pays McDonald's a continuing royalty the FY2025 20-F reports as "The amount paid during 2023 and 2024 was 7.0 % of gross sales".
• Currency is the recurring shock rather than a footnote: the same filing traces a 25.9 million dollar swing in currency exchange results between 2023 and 2024 mainly to a 27.2% depreciation of the Brazilian real.
• The next thing to watch is Brazilian restaurant traffic, which slowed after Carnaval even as first-quarter margins improved on cheaper food and paper.

Bull Case

Money here goes into the ground. Nineteen new restaurants opened in the first quarter of 2026, thirteen of them freestanding buildings rather than mall counters. Over the four years to the end of 2025 the share count grew at zero percent a year. An expansion program funded without printing stock says more about management's confidence than any slide deck does.

What that capital buys is unusual, because the asset being built sits inside somebody else's brand. The FY2025 20-F lists the arrangement under material contracts: "We hold exclusive master franchising rights" across its territories, with individual franchise terms that generally run twenty years. Arcos Dorados is therefore not competing for the McDonald's name in Latin America. It already owns the right to use it, and every drive-thru lane it builds extends a position no competitor can bid for. The obligation attached is explicit and monthly: the 20-F states the company "is required to pay to McDonald's Corporation continuing franchise fees (Royalty fees) on a monthly basis". That is the rent on the moat, and it is fixed, known, and paid out of gross sales rather than out of profit.

The margin comparison that gets made most often is the wrong one. MCD earns a 46.3% operating margin because most of its revenue is royalty income collected from operators like this one. The right comparison is another operator: YUMC runs its own stores across China and earns an 11.1% operating margin on 12.1 billion dollars of revenue. Arcos Dorados earns 7.8% on a revenue base of roughly 4.7 billion dollars. The gap to the operator comp is a few points, not the forty-point chasm the franchisor comparison implies, and it sits in markets where inflation and import costs do real damage to a food line.

Where the incremental margin is coming from is visible in the strategy the filing describes. Digital is the stated platform: the 20-F says that through the digital platform the company offers "customers personalized, fast and convenient experiences that drive engagement and repeat visits", alongside loyalty rollouts aimed at visit frequency. The first quarter of 2026 showed the operating leverage that follows when average check and traffic both cooperate, with operating income of 62.8 million dollars against 45.1 million a year earlier on revenue up 12.9%. Same store base, better economics per store, and the buildings from last year's capital budget still filling up.

Bear Case

The exposure that matters is not competitive, it is monetary. Revenue is earned in Brazilian reais, Argentine pesos, Mexican pesos and a dozen smaller currencies; the funded debt is largely dollar paper. The FY2025 20-F puts a number on what that mismatch does in a bad year: currency exchange results moved by 25.9 million dollars between 2023 and 2024, from a gain of 10.8 million to a loss of 15.1 million, which the filing attributes mainly to a 27.2% depreciation of the Brazilian real. Nothing about the restaurants changed. The unit of account did.

Governments in the territories also set prices. The filing's risk section warns that price restrictions "may place downward pressure on the prices at which our products are sold and may limit the growth of our revenue", and it separately notes that periods of higher inflation slow local economies and raise the company's own costs. A quick-service operator has two levers, menu price and traffic, and in several of these markets a regulator has a hand on the first one.

Then there is what the sales line actually contains. The 20-F describes a period in which comparable sales rose 90.8% while average check rose 96.2%, "primarily due to the inflationary context in Argentina and Venezuela". Read that carefully: the entire increase, and then some, came from charging more for the same meal in a currency losing value. Traffic went the other way. Headline sales growth in this business can be a currency statement wearing a demand costume, and a reader who marks the growth rate without deflating it will misjudge the franchise.

The obligations stack in an order that does not favor the equity. The company is liable for its sub-franchisees' royalty payments to McDonald's, which the filing states plainly: "We are liable for our sub-franchisees' monthly payment of royalties to McDonald's". Above that sit the 2032 Senior Notes, whose indenture the filing notes "provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then-outstanding 2032 Senior Notes to be due and payable immediately". Gross borrowings run to 1,137.7 million dollars against liquid assets of 422.3 million on the funded basis the balance sheet builds up, and the lease-inclusive build used elsewhere in the capital structure is larger still. Leverage of 1.96 times operating profit is not dangerous in isolation. It becomes the transmission channel when the currency earning that operating profit falls a quarter in a year, because the debt does not fall with it.

None of this is an argument that the shares are dear. Every standard method reaches or exceeds today's quote. The bear case is that the discount is deliberate: a franchisee, in emerging markets, paying a fixed share of gross sales to a franchisor, carrying hard-currency obligations against soft-currency cash flows, is a business the market has decided to pay less for, and it has reasons rather than an oversight.

Valuation

Start with what the quote is asking of the business. The whole enterprise is priced at 9.8 times its annual operating profit, which is low enough that the shares sit below what even a shrinking profit stream would warrant. This is a boundary rather than a solved figure: the market is not paying for growth here, and it is not paying for flat results either. It is paying a price consistent with operating profit going backwards.

Against that, the methods do not disagree in the usual direction. Every family of approach lands at or above the current quote, and none of them calls the shares expensive. The asset-value and earnings-power families land roughly a third above, and the forward-growth family lands essentially at the quote. The peer-multiple family lands furthest above, and that distance deserves a caveat rather than applause, because those models apply a static sector reference multiple drawn from large developed-market restaurant companies to a Latin American operator. The reference is doing the work, not the analysis.

The more informative read is the one that assumes nothing. The earnings-power approach takes the five-year average of operating income with one-time charges added back, taxes it, and capitalizes the result with no growth at all, and it still lands above where the shares trade. A no-growth capitalization of demonstrated profit reaching past the price is the single cleanest statement of what is on offer here.

Cohort position sharpens rather than settles the question. The trailing operating margin of 7.8% sits below every peer in the cohort, but the cohort mixes two different businesses. MCD collects royalties and earns 46.3%; YUM earns 31.5% on a similarly asset-light model. YUMC, which operates its own restaurants the way Arcos Dorados does, earns 11.1%, and SBUX, also a heavy company-operated model, earns 7.6%. Ranked against operators rather than licensors, this is a mid-cohort margin, not an outlier.

The balance sheet neither rescues the case nor sinks it. Borrowings run to 1,137.7 million dollars gross against 422.3 million of liquid assets on the funded build-up, which is 1.96 times operating profit, and the share count has been flat for four years running. The company is not burning cash and is not diluting holders. What the balance sheet cannot do is hedge the fact that the obligations are largely dollar-denominated while the restaurants collect in currencies that have repriced sharply within the filing history.

Catalysts

The first quarter of 2026 was the strongest print in the recent record. Revenue reached 1.216 billion dollars, up 12.9% on the year, with systemwide comparable sales up 16.0% and operating income of 62.8 million dollars against 45.1 million a year earlier. Nineteen restaurants opened during the quarter, thirteen of them freestanding units, which is the format that carries the largest capital commitment and the longest payback.

The setup going in was unusual enough to be worth noting. On February 13, 2026 the company filed a clarification stating that market commentary expecting comparable sales growth to decelerate in the first quarter versus the fourth quarter of 2025 had it backwards. Management rarely pre-empts its own print. It did here, and the reported comparable sales figure supported the correction.

The item to carry forward is Brazilian volume. Management described a strong first six weeks of the year in Brazil followed by a meaningful slowdown in restaurant volumes after Carnaval, with margin improvement in the quarter coming mainly from lower food and paper costs rather than from traffic. Cost-driven margin expansion is real but it is not the same as demand-driven expansion, and the second-quarter print is where the distinction gets settled.

Peer Cohorts (Per Segment, With Filing Citations)

Core business (reported)

• MCD (McDONALD’S CORPORATION)
• FY2025 10-K: …Operated Markets. Operating margin is defined as operating income as a percent of total revenues. The contributions to operating margin differ by segment due to each segment's ownership structure, primarily due to the relative percentage of franchised versus Company-owned and operated restaurants. Additionally,…
• FY2025 10-K: …charges associated with the sale of McDonald's business in South Korea and transaction costs associated with the acquisition of McDonald's business in Israel. McDonald's Corporation 2025 Annual Report 17 OPERATING INCOME Operating income Amount Increase/(decrease) Increase/(decrease) excluding currency translation…
• QSR (RESTAURANT BRANDS INTERNATIONAL INC.)
• FY2025 10-K: , interruptions in the availability and delivery of food, beverages, and other supplies to our restaurants or retailers arising from shortages or greater than expected demand may increase costs or reduce revenues. As of December 31, 2025, we have only one or a few suppliers to service each category of products sold at…
• FY2025 10-K: …meets our definition of a restaurant that will be included in our net restaurant growth, we consider factors such as scope of operations, format and image, separate franchise agreement, and minimum sales thresholds. We refer to restaurants that do not meet our definition as "alternative formats" and we believe these…
• YUM (YUM! BRANDS, INC.)
• FY2025 10-K: …stores, coffee shops, snack bars, delicatessens and restaurants (including those in the QSR segment), and is intensely competitive with respect to price and quality of food products, new product development, digital engagement, advertising levels and promotional initiatives, customer service reputation, restaurant…
• FY2025 10-K: . We intend to drive long-term growth and shareholder returns primarily through consistent same-store sales growth and new unit development across all of our Concepts. We intend to support this growth and development through a capital and operating structure that: 30 • Invests capital in a manner consistent with an…
• YUMC (Yum China Holdings, Inc.)
• FY2025 10-K: …to our business. Our policy is to pursue registration of our important intellectual property rights whenever feasible and to oppose vigorously any infringement of our rights. 16 2025 Form 10-K Competition Data from the National Bureau of Statistics of China indicates that sales in the restaurant industry in China…
• FY2025 10-K: …which we operate is highly competitive. The restaurant industry in which we operate is highly competitive with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance…
• CMG (CHIPOTLE MEXICAN GRILL, INC.)
• FY2025 10-K: …we believe will drive our financial results and long-term growth model. W e believe these metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies: • Comparable restaurant sales • Food, beverage, and…
• FY2025 10-K: …operating segment is comprised of all 11 operating segments located in the United States, which we have aggregated to a single operating segment in consideration of the aggregation criteria set forth in ASC 280. All other operating segments, which comprise our operations in Canada, Europe and international…
• SBUX (Starbucks Corporation)
• FY2025 10-K: …U.S company-operated store portfolio in the fourth quarter of fiscal 2025, we are focused on empowering coffeehouse leaders to take ownership of sustaining the model as our permanent way of working, which we expect to enhance the customer experience and drive future transaction growth. Further, as announced in early…
• FY2025 10-K: …fourth quarter of fiscal 2025, and incremental revenue from the conversion of 113 licensed stores to company-operated stores ($131 million) following the acquisition of 23.5 Degrees Topco Limited. Partially offsetting this increase was a 1% decline in comparable store sales ($408 million), attributable to a 2%…
• EAT (BRINKER INTERNATIONAL, INC.)
• FY2025 10-K: …results. The restaurant business is highly competitive as to price, service, restaurant location, convenience, and type and quality of food. We compete within each market with locally-owned restaurants as well as national and regional restaurant chains. The casual dining segment of the restaurant industry has not…
• FY2025 10-K: …on our business including consumer demand, costs, product mix, our strategic initiatives, operations, technology and assets, and our financial performance; the impact of current and potential tariffs and trade barriers; the impact of competition, including competitors employing our same strategies or discounting…
• DRI (DARDEN RESTAURANTS, INC.)
• FY2025 10-K: …share). SEGMENT RESULTS We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Chuy's, Yard House, Ruth's Chris, The Capital Grille, Seasons 52, Eddie V's, Bahama Breeze and The Capital Burger in the U.S. and Canada as operating segments. We aggregate our operating segments…
• FY2025 10-K: …(CODM). Our CODM uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). Non-cash lease-related expenses from our operating segments…

Methodology Note

• Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
• Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
• Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
• Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.