McDonald’s Corporation (MCD), Burger King Worldwide Inc (BKW): Something Is Being Lost In Translation

Archos Dorados makes the decision of how many stores to open each year, and it appears they may be expanding too fast. While the company’s debt-to-equity ratio at 0.88 is in line with McDonald’s at 0.89, this is a much smaller company. The company carries significant debt primarily because they choose to open company owned restaurants. If they leaned on franchisees more, they would have better margins and better cash flow to avoid this debt.

While Yum! Brands‘ debt-to-equity ratio of 1.36 is higher, the company’s significant free cash flow makes this less of an issue. Investors who own Burger King Worldwide Inc (NYSE:BKW) know that the company’s relatively high debt-to-equity ratio of 2.55 comes more from prior mis-management than anything fundamentally wrong with the concept.

Is The Stock Undervalued Anyway?
It might sound strange to suggest that Archos Dorados could be undervalued even with all of these concerns, but it seems like that’s the case. The company shows very strong comparable store sales, and if not for currency fluctuations, revenue would have increased 13.8% in the current quarter. Analysts expect EPS growth in the next few years of 15.7%, and the company paid a trailing yield of 1.76%.

While Archos Dorados doesn’t match the yield of 3.12% at McDonald’s Corporation (NYSE:MCD) or 1.95% at Yum! Brands, the company is expected to grow significantly faster. Of their peers, only Burger King is actually expected to outpace Archos Dorados in EPS growth over the next five years.

However, each of Archos Dorados‘ peers is being valued more highly based on the PEG ratio. Burger King Worldwide Inc (NYSE:BKW), for instance, has a PEG of 1.35, McDonald’s Corporation (NYSE:MCD) PEG is 1.84, and Yum! Brands PEG is 1.9. By comparison, Archos Dorados PEG of 1.31 looks reasonable. The company can certainly improve its operations by leveraging franchisees more, but Archos Dorados‘ value seems to be lost in translation in this market.

The article Something Is Being Lost In Translation originally appeared on Fool.com and is written by Chad Henage.

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