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

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.

Should you invest $1,000 in Guzman Y Gomez right now?

Before you buy Guzman Y Gomez shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Guzman Y Gomez wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 7 February 2025

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

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Growth Shares

I think these ASX growth shares could be top buys right now

I am backing these stocks to deliver significant growth.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Bank Shares

I'm getting nervous about the CBA share price

The higher CBA climbs, the more nervous I get.

Read more »

Smiling man sits in front of a graph on computer while using his mobile phone.
Opinions

If I were in my 30s I'd buy these ASX shares

These stocks were two of my latest investments.

Read more »

Shocked office worker staring at computer screen with colleagues working in the background.
Opinions

2 ASX shares with earnings results that shocked me this week

These two results really surprised me.

Read more »

Emotional euphoric young woman giving high five to male partner, celebrating family achievement, getting bank loan approval, or financial or investing success.
Opinions

1 ASX dividend stock up 40% in 12 months that I'd buy

I’m backing this company to deliver pleasing dividends.

Read more »

A smiling man take a big bite out of a burrito
Opinions

Is it worth me buying Guzman Y Gomez shares for $40 after a 33% rise?

Is the valuation too spicy or is this a good time to invest?

Read more »

Businessman smiles with arms outstretched after receiving good news.
Best Shares

Here are 3 of my most profitable investments in ASX shares ever (and which one I'd buy more of right now)

I reckon only one of these shares is worthy of a buy today.

Read more »

An ASX investor relaxes on her couch as the Harvey Norman share price drops due to the shares trading ex-dividend from today.
Opinions

This ASX 300 stock soared 15% after reporting. Time to buy?

This business is a great operator. Is it time to buy?

Read more »