Major Defensive Hit: McDonald’s Crushed In Latin America (MCD, ARCO, YUM)

McDonald’s Corporation (NYSE: MCD) is supposed to be the king of defensive stocks. It pays a dividend of close to 3%, it was the best performing DJIA component in 2011, and after all everyone has to eat!  Shares are down about 6% from their all-time highs and now the stock is down about 3% so far in 2012 even though analysts now have a consensus price target of over $107 per share on the stock.

There is a larger question to ask outside of what may be a domestic growth story and what lies beyond the retirement of its super-star CEO James Skinner.  What about that Latin American version of McDonald’s?  This is where Arcos Dorados Holdings Inc. (NYSE: ARCO) comes into play.  The name translates from Spanish to “Golden Arches” in English.

This stock was already falling this week but the stock is literally getting gutted to a post-IPO low after its earnings report. As of the end of 2011 it operated or franchised some 1,840 McDonald’s-branded restaurants with over 90,000 employees serving approximately 4.3 million customers a day.  You can argue that the weak U.S. jobs data might translate to more weakness in Latin America, but many of the key growth markets in Latin America were already seeing slower growth on their own ahead of the U.S. economic data weakening.

Arcos Dorados reported earnings Friday and showed that first quarter revenues gained 11.5% to $921.6 million but that would have been up 16.6% on a constant currency basis.  The company said that its systemwide comparable sales growth was 11.6%.  Net income fell 28.4% to $25.4 million, due to higher depreciation expense, higher capital spending, higher foreign exchange losses, along with higher tax charges, and lower gains from the sale of property and equipment.

Cash and cash equivalents were $144.3 million and its total financial debt was $540.1 million as of March 31, 2012.  Arcos Dorados added 86 restaurants during the last 12-month period.  It was last month that the company decided to initiate a dividend and that payment would currently come to about 1.6% now that the share price is under $15.00.

The prior post-IPO range was $16.79 to $29.43 and now the stock is down over 50% from its highs.  As of mid-Friday the stock is down about 18% at $14.00 with volume already running over 200% above normal with some 5.1 million shares traded.

Today’s reaction in Arcos Dorados is very confusing on the surface.  This was one super-hot IPO in 2011.  The IPO came out at $17.00 per share, well above the expected range of $13.00 to $15.00 per share and this stock rose more than $4.00 on its debut to only eventually go up to above $29.00 at the peak.  The sell-off sure feels like something worse than beating revenues but missing on earnings is at work.

Yum! Brands, Inc. (NYSE: YUM) has also been soft and the 1.5% drop today to $70.90 is down from an all-time of $74.44.  Yum! has its growth story tied more to China than Latin America.

You might not know that the DJIA was recently at year highs for 2012.  This is one of those days where even the defensive stocks are not holding up well.  Why is “Sell in May and go away!” ringing such a strong bell right now?

JON C. OGG