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

I think this business has a strong outlook.

| More on:
A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

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.

More on Opinions

Man smiling at a laptop because of a rising share price.
Opinions

My 2 favourite ASX sectors to invest in

Finding your groove can help your investing success.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
Opinions

3 things I learned from Warren Buffett being the CEO of Berkshire Hathaway

The Oracle from Omaha is in his last year as CEO.

Read more »

Man looking happy and excited as he looks at his mobile phone.
Opinions

Why I think this small ASX dividend share is a great buy today

This small business offers a lot of what I like for passive income.

Read more »

A corporate man crosses his arms to make an X, indicating no deal.
Opinions

How to invest: my 3 biggest ASX share dealbreakers

I want to avoid certain things with my investing.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Opinions

Why I think these 2 ASX shares are bargain buys

I like the value offered by these stocks.

Read more »

Smiling couple sitting on a couch with laptops fist pump each other.
Opinions

My favourite ASX 200 stock in my portfolio right now

This business has a lot going for it, in my opinion.

Read more »

A man casually dressed looks to the side in a pensive, thoughtful manner with one hand under his chin, holding a mobile phone in his hand while thinking about something.
Opinions

Investing in high-yield ASX stocks has two major negatives

High-yield stocks do have downsides.

Read more »

A young woman in a red polka-dot dress holds an old-fashioned green telephone set in one hand and raises the phone to her ear representing the Telstra share price and the opportunity for investors in FY23
Opinions

The Telstra share price hit a 52-week high this week, is it still a buy?

Is buying Telstra still a good call after its rise?

Read more »