Why Guzman y Gomez shares are a buy after crashing on earnings results

A leading expert says the sell-off in Guzman y Gomez stock is an overreaction. But why?

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Guzman Y Gomez (ASX: GYG) shares have been in sharp decline since 20 February.

Shares in the S&P/ASX 200 Index (ASX: XJO) Mexican fast food restaurant chain, which listed on the ASX 200 on 20 June, remain well up from the initial public offering (IPO) price of $22.00.

And at Tuesday's closing price of $32.65, shares are also still up nearly 9% from the $30.00 a share the ASX 200 stock closed at the end of its first day of trading on the ASX.

However, it's been a starkly different story over the past three weeks.

The company reported its half-year results on 21 February, and Guzman y Gomez shares crashed 14.3% on the day. As of yesterday's close, shares are down more than 27% since 20 February.

But according to Baker Young's Toby Grimm, the sell-off has been an overreaction (courtesy of The Bull).

Are Guzman y Gomez shares oversold?

"GYG is a Mexican themed restaurant chain. The company had 239 restaurants operating in Australia, Singapore, Japan and the US at December 31, 2024," said Grimm, who has a buy recommendation on Guzman y Gomez shares.

He noted that, "The shares have fallen from $45.32 on February 19 to trade at $33.77 on March 6."

And Grimm said that the sell-off appears overdone.

"The steep decline in the company's share price following its recent interim results is an over-reaction to modestly weaker than expected underlying earnings reported for the period," he noted.

"Critically, GYG delivered better than expected sales growth, which continued into the second half, vindicating its decision to invest in competitive pricing," Grimm said.

The company reported comparable store sales growth of 12.2% for the first seven weeks of the second half, beating consensus expectations.

What's been happening with the ASX 200 fast food stock?

Guzman y Gomez shares were hammered on the day the company reported its half-year results despite solid growth metrics from its Australian-based restaurants.

On a group wide level, the company reported network sales for the six months of $577.9 million, up 22.8% year on year. Revenue was up 27% to $212.4 million. On the bottom line, the company's profit after tax increased by 91.2% to $7.3 million.

In its United States segment, however, the company reported a 12.7% decline in network sales to $4.9 million.

As for the growth outlook for Guzman y Gomez shares, CEO Steven Marks said:

We finished the half with 239 restaurants globally, opening 19 new restaurants (16 in Australia). We have more than 100 future restaurants in our pipeline, all in AAA locations, positioning us well for solid expansion in the coming years.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. 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.

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