Guzman y Gomez shares rocket 36% on IPO day

The quick service restaurant operator is having a stunning first day on the ASX boards.

| More on:
A bearded man holds both arms up diagonally and points with his index fingers to the sky with a thrilled look on his face over these rising Tassal share price

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 Limited (ASX: GYG) shares have started life as a listed company with an almighty bang.

After commencing trade at midday with an IPO listing price of $22.00, the quick service restaurant (QSR) operator's shares opened 36% higher at $30.00.

Investors don't appear fazed by some analysts declaring the Mexican food chain as expensive compared to peers Collins Foods Ltd (ASX: CKF) and Domino's Pizza Enterprises Ltd (ASX: DMP).

Nor are they bothered by concerns over how Guzman y Gomez treats its lease liabilities or the mixed track record for private equity IPOs.

Guzman y Gomez shares have strong start

Judging by the way that Guzman y Gomez shares have burst out of the gates, it seems that investors are buying into management's growth plans.

Guzman y Gomez's revealed that its growth strategy is centred around new restaurant openings in Australia, existing restaurant sales growth, margin improvement, digital initiatives, and international growth.

In respect to the former, the company advised that new restaurant openings in Australia are expected to be the primary contributor to its network sales growth over the long term. It believes there is an opportunity to grow its network to more than 1,000 restaurants in Australia over the next 20+ years. This compares to the 185 restaurants that it operates across the country today.

Supporting this expansion is its belief that it has substantially built the team, restaurant pipeline, and infrastructure to be able to open 30 new restaurants per year over the near-term. It also sees scope to increase this to 40 new restaurant openings per year within 5 years.

Management also sees the United States as a growth opportunity given the large size of its QSR market.

However, it is taking a measured approach to its expansion in the United States and anticipates opening up to three additional corporate restaurants in the Greater Chicago region in FY 2025. It currently operates four restaurants in the country.

But management has warned that while it believes there is a large growth opportunity in the United States due to the size of the market, it will continually assess and adjust the pace and extent of new restaurant expansion having regard to the financial and operational performance of existing restaurants. After all, there is significant competition in the QSR industry and existing players in the same space, such as Chipotle (NYSE: CMG), already have significant brand equity and large footprints.

Earnings forecasts and sky-high valuation

It is fair to say that Guzman y Gomez has very skinny margins at present.

For example, in FY 2023, it reported revenue of $259 million and a profit after tax of $3 million, representing a profit margin of 1.16%.

In FY 2024, revenue is expected to increase to $339.7 million with a profit after tax of $3.4 million. After which, revenue of $428.2 million is forecast for FY 2025, with a profit after tax of $6 million. The latter will mean a profit margin of just 1.4%.

But that isn't putting off investors, which are valuing the company at $3 billion. This gives it a staggering forecast FY 2025 PE ratio of 500x.

It certainly will be interesting to see how the company and its shares fare in the coming years once the IPO magic wears off.

Motley Fool contributor James Mickleboro has positions in Collins Foods and Domino's Pizza Enterprises. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Chipotle Mexican Grill and Domino's Pizza Enterprises. The Motley Fool Australia has recommended Chipotle Mexican Grill, Collins Foods, and Domino's Pizza Enterprises. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on IPOs

Modern accountant woman in a light business suit in modern green office with documents and laptop.
IPOs

What percentage of GYG shares are owned by the company founders?

Guzman's founders have done well from the company's IPO...

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
IPOs

How rich are the Guzman Y Gomez founders following the company's IPO?

Guzman's IPO has netted its co-founders millions...

Read more »

Investor covering eyes in front of laptop
IPOs

Guzman y Gomez share price implodes 10% on ASX trading day 2

The Guzman Y Gomez share price is tumbling on Friday. But why?

Read more »

A happy investor sits at his desk in front of his laptop and does the mexican wave with his arms to celebrate the returns from his ASX dividend shares
IPOs

Who owns Guzman y Gomez shares?

Holy Guacamole! These investors have a lot of money in Guzman y Gomez shares.

Read more »

Two children and a dog get set to launch their friend rocketing high into the sky.
IPOs

It's only a day until ASX investors can buy Guzman y Gomez shares

We're only one sleep away from the fast food company's ASX debut.

Read more »

A man casually dressed looks to the side in a pensive, thoughtful manner with one hand under his chin, holding a mobile phone in his hand while thinking about something.
IPOs

Is Guzman y Gomez stock too expensive?

Should you stay clear of this hot IPO?

Read more »

three young women smile as they hold up their loaded orn chips as they sit in front of a large bowl of dip.
IPOs

Who is investing in the Guzman y Gomez IPO?

Some substantial investors are planning to buy GYG shares.

Read more »

A laughing woman holds her hands up, indicating a share price racing higher ahead of a trading halt on the ASX market
IPOs

Life 360 shares halted ahead of Nasdaq IPO

Life360 requested a trading halt today as it prepares for an announcement.

Read more »