Arcos Dorados Holding Inc (NYSE: ARCO) reported its fourth quarter 2016 earnings results today, and made a new 52-week high of $7.80. Prior to its earnings results, the stock has been up over the past five trading days, outperforming the industry by 2.52%. Additionally, ARCO has been up over 125% over the past year, while the restaurants industry returned just 8.50% over the same period, as of March 14, 2017.
Arcos Dorados is a McDonald’s Corporation (NYSE:MCD) franchise. ARCO grants, operates and owns franchises of McDonald’s restaurants in around 20 countries and territories in the Caribbean and Latin America. Arcos Dorados currently operates or franchises over 2K McDonald’s-branded restaurants.
Fourth Quarter 2016 Financial Results
Arcos Dorados Holding Inc reported net income of $21.2M for the fourth quarter of 2016, significantly above its net income of $5.6M for the 2015 fourth quarter. For the 2016 fiscal year, Arcos Dorados reported net income of $78.8M, which was an impressive improvement from its net loss of $51.6M in the 2015 fiscal year. That said, Arcos Dorados seems to be improving, which could explain its meteoric rise today.
Arcos Dorados Options Activity
We saw some heavy call buying today in Arcos Dorados Holdings. These bullish bets came in during the conference call. One particular order that comes to mind, at 10:16 AM ET, a trader came in bought 4,000 of the May 6 calls at $1.20 a piece. The stock was trading at $6.85 when the order went off, and the trader paid a total premium of $480K. In total, the options activity in ARCO was 73.9X above average.
However, that was not the only action we saw. For example, August calls were also active. What makes the May calls so interesting is that previous to that order, there was open interest of only 483 contacts. In other words, that 4K option order was an opening position.
The traders need to see the stock get to $7.20 (premium plus strike price), in order to break-even. Well, the stock closed at $7.60 on the day, making those options in-the-money.
That means those options gained at least 40 cents of premium. That is a gain of at least 33% for the option trader, amounting to of $166,000. When an option goes in-the-money, the trader can hedge out of their position by selling stock to lock in profits. They have the freedom of closing out with options or stock. However, let’s assume that they didn’t lock in profits today, they have the option to get long 400K shares on or before the May expiration date. If the stock price closes one penny above $6, then they will be assigned the shares.
All in all, this was a very impressive trade. Not only that, but the stock is thinly traded, the options were a much more strategic way to get long the stock.
ARCO Key Figures
Here are key figures that traders are currently paying attention to:
– Arcos Dorados Holding Inc had a market cap of $1,61B as of the close on March 15, 2017.
– Arcos Dorados Holding Inc had 212,383,333 outstanding shares and a short interest of 304,087 shares, or 0.14% shares short.
– ARCO had a trailing 12-month EPS of $0.30, and it did not have any revenue over this period.
– ARCO reported total liabilities of $1.15B and total equity of $351M in its recent financial statements.
– Arcos Dorados Holding Inc had a debt-to-equity ratio of 3.28, indicating ARCO has a high degree of debt, and may be in poor financial health.
The company reported strong fourth quarter and full year 2016 fiscal results. ARCO was able to grow its net income year over year, providing one reason to be bullish on the name. Additionally, Arcos Dorados has been significantly outperforming the restaurants industry, and it could continue to build momentum. There was heavy option activity on the call side, indicating some traders may be bullish on the stock. Moreover, the company provided its long-term outlook, and it expects cash flow generation to grow over the next three years, and to focus on increasing restaurant volumes, which could further bolster its earnings. Consequently, its stock price could continue to rise.
Now, there’s also a bear case for Arcos Dorados. The stock may be in poor financial health due to its high debt-to-equity ratio. Moreover, the stock has been up significantly, and it would be considered a counter-trend or contrarian trade.