3 reasons the Guzman y Gomez (GYG) share price could still be a buy

Here's why I think spicy growth could continue.

| More on:
A smiling man take a big bite out of a burrito

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

sdf

The Guzman Y Gomez Ltd (ASX: GYG) share price has risen almost 23% since its opening-day closing price of $30. It's an incredible achievement considering some investors were calling the initial public offering (IPO) price of $22 expensive.

Created with Highcharts 11.4.3Guzman Y Gomez PriceZoom1M3M6MYTD1Y5Y10YALL20 Jun 202417 Nov 2024Zoom ▾1 Jul15 Jul29 Jul12 Aug26 Aug9 Sep23 Sep7 Oct21 Oct4 NovJul '24Jul '24Aug '24Aug '24Sep '24Sep '24Oct '24Oct '24Nov '24Nov '24www.fool.com.au

Being a GYG shareholder has been rewarding due to capital growth, and I believe there are still reasons to remain optimistic.

Although there will likely be volatility over the next few years, I'd view these periods as opportunities to buy discounted shares of a compelling business.

Strong comparable growth

I think it's essential for a retail business to deliver growth from within its existing locations. This demonstrates a company's performance in existing regions and the health of its overall network.

If comparable sales are weak, this could imply customers are turning away from the business, and there may be stronger competition.

Guzman y Gomez reported that its Australian, Singaporean, and Japanese net sales had combined comparable year-over-year growth of 8.7% in the first quarter of FY25. This level of comparable growth is very good, in my opinion, considering the economic challenges facing households, and also doesn't take into account the network's growth.

Store rollout plans

GYG is growing rapidly, partly due to the number of new restaurants it has added to its network each year and plans to keep adding.

At 30 September 2024, the business had 226 locations across Australia, Singapore, Japan and the US. That represented an increase of 10.8% year over year, which is a great tailwind for Guzman y Gomez shares.

If GYG can keep adding a sizeable number of locations to its portfolio each year, then it can really supercharge its growth. In the FY25 first quarter, the business reported total network sales growth of 20.7%.

Guzman y Gomez currently has an ultra-long-term target of 1,000 Australian locations, which, in my view, would unlock a significant increase in profitability for the business due to scale benefits.

Improving margins

I think one of the most important factors for GYG shares' future success will be increasing profit margins, which could significantly improve the bottom line.

It's very pleasing to see profit rise faster than revenue because investors typically value a business based on profit.

In the FY24 result, Guzman y Gomez reported its revenue increased 32.1% to $342.2 million, underlying operating profit (EBITDA) rose by 52.9% to $44.8 million, and underlying profit before tax (PBT) jumped 113.7% to 16.3 million.

Pleasingly, the company reported that its corporate restaurant profit margin increased from 14.4% to 17.4%, a three percentage point increase.

With impressive plans to grow significantly in scale over the next decade or two, I believe Guzman y Gomez shares can continue rising, despite current valuations.

Motley Fool contributor Tristan Harrison has positions in Guzman Y Gomez. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

ASX 200 retail shares a woman smiles over the top of multiple shopping bags she is holding in both hands up near her face.
Opinions

Up 90% in a year, is it too late to buy Zip shares?

Should investors buy this stock now or wait until later?

Read more »

A trio of ASX shares analysts huddle together in an office with computer screens all around them showing share price movements
Opinions

2 of the best ASX 200 shares to buy right now

I think these stocks are excellent buys for the long-term.

Read more »

Concept image of a businessman riding a bull on an upwards arrow.
Opinions

I'm very bullish on these 2 ASX stocks

I think these are two of the best ASX investments money can buy.

Read more »

Young businesswoman sitting in kitchen and working on laptop.
Opinions

Should I buy Berkshire Hathaway or Soul Patts shares?

Both have been stand out investments over the long term.

Read more »

A photo of a young couple who are purchasing fruits and vegetables at a market shop.
Opinions

Here are 2 of the ASX's most hated shares. Which should I consider buying?

Could today's dogs be tomorrow's stars?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Opinions

Where I'd invest $5,000 into ASX shares today

I’m excited by what these stocks can achieve.

Read more »

An analyst wearing a dark blue shirt and glasses sits at his computer with his chin resting on his hands as he looks at the CBA share price movement today
Opinions

What are Soul Patts shares worth?

This company has delivered strong gains. But what is its intrinsic value?

Read more »

Two funeral workers with a laptop surrounded by cofins.
Opinions

2 exciting ASX 300 shares on sale right now

I’m bullish about these exciting businesses.

Read more »