Why I'm planning to buy Guzman y Gomez shares and own for the long-term

I think this business has a strong outlook.

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The Mexican food business Guzman y Gomez (GYG) is planning to list on the ASX this week with an initial public offering (IPO). As there is so much attention on the company, I am going to outline what attracts me to it and why I plan to buy shares.

It's scheduled to trade on the ASX on Thursday, 20 June 2024, on a conditional and deferred settlement basis. Normal trading is expected on the ASX on a normal settlement basis on 25 June 2024.

The business is planning to raise $200 million in primary proceeds and $135.1 million through existing investors selling down some of their stake.

Strong sales growth and international potential

The Mexican food company has grown significantly in the last several years.

In FY15, the business generated $101 million of global network sales, which increased to $759 million in the 2023 financial year. That's a compound annual growth rate (CAGR) of 29% over the period. Management is expecting further growth in the coming years.

Guzman y Gomez has forecast that global network sales can increase to $954.4 million in FY24 and $1.14 billion in FY25. That would be an increase of around 50% between FY23 and FY25.

I believe GYG can continue to grow its global network sales at a double-digit rate for years to come because of its growing Australian and international presence.

The company's pro-forma (underlying) earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to increase from $29.3 million in FY23 to $59.9 million in FY25. 

Store rollout plan

Some successful businesses have generated excellent returns by expanding their store networks. Just think about global winners like McDonald's, Yum! Brands, and Chipotle.

I'm not suggesting GYG will do as well as those businesses. On the ASX, Collins Foods Ltd (ASX: CKF) has done very well for shareholders over the past decade. But GYG isn't a franchisee business like Collins Foods, so GYG can benefit from franchisee sales growth locally or globally.

Guzman y Gomez has a hybrid restaurant ownership model with a mix of corporate and franchise restaurants. It has 185 restaurants in Australia, including 62 corporate restaurants and 123 franchise restaurants. The business has four corporate restaurants in the US.

GYG also has 16 restaurants in Singapore and five restaurants in Japan which are owned and operated by separate master franchisees. GYG earns royalty revenue from franchisee sales.

In Australia, GYG expects to open 30 new restaurants in FY25 and thinks it can increase its annual openings to 40 per year within five years. It thinks it can reach over 1,000 Australian locations over the "next 20+ years". The Guzman y Gomez listing value may not be cheap, but I'm thinking about where the business may be in three years, five years and ten years, not just its position in June 2024.

The company plans to expand in the US, though it will "continually assess and adjust the pace of restaurant expansion to ensure it is underpinned by robust restaurant economics." It's expecting to have seven US stores in FY25, up from four now.

Becoming bigger can help drive the underlying profit margins and value of the business.

Rising margins

Investors often like to value a business based on how much profit it's making now and what it can make in the future. Rising profit margins can help the bottom line grow even faster than revenue.

Guzman y Gomez showed in its prospectus that its EBITDA to global network sales margin was 3.8% in FY22 and 3.9% in FY23. GYG projects this to increase to 4.5% in FY24 and 5.3% in FY25. Rising margins are a promising sign of economies of scale.

In five years, the Mexican food business could be much bigger and earn even stronger margins (on much higher revenue), which bodes well for future profit.

Foolish takeaway

There could be a lot of volatility with GYG shares in the short term because some investors think they're overvalued, and others think they have compelling long-term value. I'm planning to start with a minimal investment and then buy more on any weakness or buy more over time as the business executes its store rollout plan and delivers high margins.

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Motley Fool contributor Tristan Harrison has positions in Collins Foods. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Chipotle Mexican Grill. The Motley Fool Australia has recommended Chipotle Mexican Grill and Collins Foods. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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