Goldman says sell Guzman Y Gomez and buy this ASX share

The broker thinks the Mexican food chain's shares are heading deep into the red.

| More on:
A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.

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

Guzman Y Gomez Ltd (ASX: GYG) shares have been strong performers since listing on the Australian share market earlier this year.

However, one leading broker is calling time on this rally and is urging investors to hit the sell button today.

Time to sell Guzman Y Gomez shares

According to a note out of Goldman Sachs, its analysts think the quick service restaurant (QSR) operator's shares could be overvalued at current levels.

This morning, the broker has initiated coverage on the company's shares with a sell rating and $33.20 price target.

Based on its current share price of $39.26, this implies potential downside of approximately 15.5% for Guzman Y Gomez shares over the next 12 months.

Although the broker acknowledges that Guzman Y Gomez is a high-quality QSR operator, it thinks the market is too ambitious on its growth expectations.

In addition, it highlights that there will be a significant number of shares coming out of escrow in the near future that could end up being sold.

Commenting on its sell rating, the broker said:

We consider Guzman to be a high quality QSR operator with multiple levers available to grow operations, as well as a high likelihood of exceeding FY25 prospectus forecasts. However, the basis of our Sell thesis is centered on 1) an overly ambitious long-term store expansion profile that has no recent successful precedent in the Australian market; and 2) a stretched valuation that has, inappropriately in our view, been pegged to the highest growth US-peers without taking into consideration the market differences and risks associated with an accelerated store expansion. Separately we note an overhang exists with c.13% of total shares expected to be released from escrow in March 2025 and the remaining c.40% in August 2025.

Instead of Guzman Y Gomez shares, Goldman is recommending another QSR operator.

Buy this stock instead

This morning, Goldman has also initiated coverage on KFC restaurant operator Collins Foods Ltd (ASX: CKF).

It has commenced coverage with a buy rating and $10.00 price target. This implies potential upside of almost 16% for investors from current levels.

It believes that the company's outlook is becoming more positive, which could make now the time to buy. It said:

Like many consumer companies, Collins has been unable to escape the rising cost and tough consumer environment which led to recent margin downgrades. However, we consider the outlook to be incrementally more positive with our Buy thesis centered on 1) a moderation of cost growth with wages, poultry, electricity and rent growth moderating, while oils and grains have returned to pre-covid levels; 2) improved discretionary spending in Collins' key states (Qld & WA) and potential for increased Digital sales penetration; and 3) Netherlands KFC presence reaching scale and improved KFC Europe margins long-term.

Motley Fool contributor James Mickleboro has positions in Collins Foods. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended 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 Broker Notes

A bricklayer peeps over the top of a brick wall he is laying with a level measuring tool on top.
Broker Notes

Are Brickworks shares a buy, hold or sell ahead of earnings season?

Brokers have been weighing property gains, US headwinds, and merger impacts to form a view.

Read more »

A man in his office leans back in his chair with his hands behind his head looking out his window at the city, sitting back and relaxed, confident in his ASX share investments for the long term.
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

A woman with a mobile phone in her hand looks sceptical with a puzzled expression on her face with an eyebrow raised and pursed lips.
Broker Notes

Buy these 2 ASX consumer stocks in the dip: expert

Can you guess which 2 were named?

Read more »

Miner puts thumbs up in front of gold mine quarry
Gold

Why Macquarie expects this ASX 200 gold stock to surge 55%

Macquarie forecasts a big rebound ahead for this beaten down ASX 200 gold miner.

Read more »

Man smiling at a laptop because of a rising share price.
Broker Notes

4 ASX shares to buy this week: experts

Looking for investment inspiration?

Read more »

Excited couple celebrating success while looking at smartphone.
Broker Notes

Macquarie forecasts 28% upside for this ASX All Ords stock

Let's see why the broker is feeling bullish about this name.

Read more »

A share market analyst looks at his computer screen in front of him showing ASX share price movements
Broker Notes

What's Macquarie focused on this earnings season?

Here's what the broker is saying about next month's results releases.

Read more »

A young man goes over his finances and investment portfolio at home.
Broker Notes

Should you buy Zip shares and sell NextDC shares?

Let's see what one analyst is saying about these popular shares.

Read more »