The Guzman Y Gomez Ltd (ASX: GYG) share price has taken a tumble. The Mexican food business has fallen 26% since 20 February 2025, as the chart below shows.
GYG shares have suffered following the release of its FY25 half-year result. GYG reported that in the first six months of FY25, network sales grew 22.8% to $577.9 million, revenue rose 27% to $212.4 million, operating profit (EBITDA) rose 28.3% to $31.6 million, profit before tax (PBT) increased 51.4% to $15.2 million, and net profit after tax (NPAT) increased 91.2% to $7.3 million.
Different investors may have sold for different reasons, but UBS decided to reduce its estimates for underlying EBITDA by 11.3% in FY25 and 4.4% in FY26 because of higher projected general and administrative expenses (G&A) and losses in the US.
In the first half of FY25, the US segment saw network sales decline 12.7% to $4.9 million and underlying EBITDA worsen by 62% to $5 million, following a 48% rise in G&A costs.
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Why the Guzman y Gomez share price could be undervalued
The business isn't what I'd call cheap at this level, but I think the HY25 result – its first result as an ASX-listed business – demonstrated the quality of GYG and showed why it has a compelling future.
Guzman y Gomez said that its Australia, Singapore and Japan segment saw comparable sales grow by 9.4%. That implies the existing store network is performing strongly on the sales side of things. In the first seven weeks of the second half, comparable sales growth was above expectations at 12.2%.
The fact that net profit soared at a much stronger pace than total network sales shows how the business has operating leverage. The bigger it gets, the more its profit margins can grow, which should be a strong tailwind for the Guzman y Gomez share price.
Its Australian drive-through restaurants continue to perform well. It added 18 new drive-through locations, bringing the total number of drive-throughs to 104. The Australian drive-through businesses saw the restaurant margin grow by 18.5% to $1.6 million, and the network restaurant margin improved 0.2 percentage points to 21.8%.
Of the franchisee restaurants, their own profitability also looks good, with a franchisee return on investment (ROI) of 50%.
The health of GYG's existing network is vital as it rolls out additional locations. It plans to open 31 restaurants in FY25 and wants to reach annual store openings of at least 40 in the future, with around 85% of those being drive-throughs.
While it doesn't have the profit margins of a tech stock, I think the business is demonstrating strong growth credentials and has a compelling long-term future. UBS is projecting the business could make a net profit of $119 million in FY29, which implies the company is trading at 30x FY29's estimated earnings.
While it's not a bargain, and it could fall further amid share market tariff volatility or possible shareholder sell-downs, I think the current Guzman y Gomez share price is more appealing for a long-term buy.
