Should You Buy McDonald's Largest Franchisee, or All of Domino's Pizza?

Choosing between a massive regional franchise operator and a global delivery powerhouse requires weighing localized expansion against digital-first scale. Arcos Dorados (NYSE:ARCO) and Domino's Pizza (NASDAQ:DPZ) both offer distinct paths to long-term returns.

Arcos Dorados acts as the primary engine for McDonald's in the Caribbean and Latin America, focusing on physical expansion in developing economies. Conversely, Domino's thrives on its delivery efficiency and massive global store count. Both companies represent established players in the restaurant industry but differ significantly in their geographic focus and capital structures.

The case for Arcos Dorados

Arcos Dorados operates as the world's largest independent McDonald's franchisee, managing nearly 2,500 restaurants across 21 countries and territories. The company focuses on its Experience of the Future format, which incorporates digital kiosks and modernized dining rooms to attract a younger customer base.

In FY 2025, revenue reached nearly $4.7 billion, representing growth of roughly 4.7% compared to the previous year. This revenue expansion occurred as Arcos Dorados expanded its footprint within the consumer discretionary stocks category. The company reported a net income of approximately $212.1 million for the period, while its net margin, which is the percentage of revenue remaining after all costs are paid, reached roughly 4.5%.

As of its December 2025 balance sheet, the debt-to-equity ratio was approximately 2.9x. This metric compares total debt to shareholder equity, indicating that the company uses more borrowed funds than its own capital to finance operations. The current ratio, which measures the ability to pay short-term debts with assets like cash and inventory, was roughly 1.0x. Free cash flow for the period was approximately $15.0 million, representing the cash generated after paying for capital projects.

The case for Domino's Pizza

Domino's Pizza operates a global pizza empire with more than 22,100 stores, emphasizing a model built on delivery and carryout convenience. The company maintains active multinational partnership agreements with Uber Technologies and DoorDash, allowing customers to order through third-party platforms while maintaining its own digital sales channels. Its largest franchisee, Domino’s Pizza Enterprises, operates 3,524 stores, representing roughly 16% of the company's global store count and 1.4% of total revenue.

During FY 2025, the company generated total revenue of nearly $4.9 billion, which was a 5.0% increase over the previous year. Net income for the fiscal year reached approximately $601.7 million, helping the company maintain a steady financial performance. The net margin was roughly 12.2%, a figure that reflects the high profitability typically associated with a global franchisor model where most store-level costs are borne by independent partners.

As of the December 2025 balance sheet, the debt-to-equity ratio was approximately -1.3x. This negative value indicates that total liabilities exceed shareholder equity. The current ratio stood at nearly 1.7x, suggesting a healthy level of short-term liquidity for its current obligations. Free cash flow was approximately $671.5 million, providing the company with significant capital to fund its business operations and return value to shareholders.

Risk profile comparison

Arcos Dorados faces significant risks related to economic instability and currency fluctuations across its various Latin American markets. The company must manage rising labor and commodity costs, which can exert pressure on its operating margins. Furthermore, the business is heavily dependent on its master franchise agreement with McDonald's, requiring it to meet specific brand standards and capital investment requirements to maintain its operating rights.

Domino's Pizza operates in a highly competitive market, facing pressure from national chains like Yum! Brands and third-party delivery aggregators. The company is exposed to commodity volatility, particularly for cheese, which is its largest single food cost component. Additionally, there are risks associated with the franchisee model, including potential franchisee insolvency or the failure of the fortressing strategy to grow sales without cannibalizing existing store locations.

Valuation comparison

Arcos Dorados trades at a lower P/S ratio, while Domino's Pizza carries a higher forward P/E, which compares price to future earnings estimates.

Sector benchmark uses the SPDR XLY sector ETF. Valuation metrics sourced from Financial Modeling Prep (FMP) and may differ from other data providers.

Which stock would I buy in 2026?

Consumer staples can be a good place to park some investment dollars if you’re worried about inflation or other macroeconomic headwinds. And stocks that represent inexpensive, quick-service food like pizza and hamburgers can be a solid defensive choice when you’re concerned about a weak consumer. Arcos Dorados and Domino’s Pizza present an interesting matchup. Domino’s and McDonald’s are both global restaurant behemoths, but Arcos Dorados’ focus on franchising McDonald’s restaurants in Latin America and the Caribbean presents more potential upside as well as the risks that usually come with investing in emerging markets.

Revenue and growth in 2025 were about equal for both companies, but Domino’s reported nearly triple the net income of Arcos Dorados, indicating it’s running more efficiently, generating more money to invest back into the business or return to shareholders. This is the argument for Domino’s being the more defensive stock.

Yet over the last year, Arcos Dorados has come out on top, returning almost 11% with dividends reinvested, compared to Domino’s stock’s nearly 35% decline. If you’re looking to maximize growth potential, Arcos Dorados may have the edge here. It also pays a larger dividend, at 3.3%, compared to Domino’s 2.63%.

Sarah Sidlow has positions in Domino's Pizza. The Motley Fool has positions in and recommends Domino's Pizza, DoorDash, and Uber Technologies. The Motley Fool recommends Yum! Brands and recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.