How does the Guzman Y Gomez ASX valuation compare to Domino's?

Is GYG very expensive? Let's compare it to an ASX peer.

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As most investors would know, Guzman Y Gomez Ltd (ASX: GYG) shares are now trading on the ASX. However, some investors are questioning whether the Mexican fast-food company is expensive. Let's see how it compares to the competition.

There aren't too many fast-food companies trading on the ASX, but Domino's Pizza Enterprises Ltd (ASX: DMP) is a good business to compare GYG to.

Both companies have comparable valuations. Guzman Y Gomez currently has a market capitalisation of $2.93 billion, and Domino's has a market capitalisation of $3.31 billion.

Domino's also has a long-term target of significantly growing its global store count, just like GYG.

However, there are other more helpful measures for comparing businesses. Let's dig in.

How to compare these ASX shares

Domino's has been a listed ASX business for close to two decades, while GYG is newly-listed.

It may not be helpful to compare them based on how much net profit after tax (NPAT) they're making because Guzman Y Gomez is investing heavily for growth, while Domino's has been profitable for some time.

Revenue may not be the most useful comparison either because their business models are somewhat different.

Earnings before interest, tax, depreciation and amortisation (EBITDA) and earnings before interest and tax (EBIT) are not perfect profit measures, but they could help us compare these two businesses for the next two or three years until GYG starts generating sizeable NPAT.

For now, all we can go on is the GYG prospectus information. Then, in a few months, we'll examine GYG's FY24 statutory result.

Forecast Guzman Y Gomez profitability

Guzman Y Gomez has forecast that it can generate pro forma (underlying) EBITDA of $43 million and pro forma (underlying) EBIT of $12 million in FY24. GYG predicts that statutory EBITDA will be $25.4 million in FY24.

GYG's FY25 statutory EBITDA and EBIT are projected to be $59.9 million and $19.7 million, respectively. Those numbers suggest that GYG could deliver good double-digit growth in FY25.

I think FY25 is a more useful year to look at because it reflects where the company could be in 12 months from now. Even then, a year is not long in investing terms.

At the current GYG share price and market capitalisation, it's valued at 149x its FY25 estimated EBIT.

The broker UBS believes Domino's profitability can materially recover in FY25 after its inflation and post-COVID difficulties.

UBS has forecast Domino's can generate $244 million of EBIT in FY25 (a rise of $30 million compared to the estimate for FY24). At the current Domino's share price, it's valued at 13.5x FY25's estimated EBIT.

Clearly, Domino's is a lot cheaper than Guzman Y Gomez based on FY25's predicted profitability. The Domino's share price is down close to 40% this year, so it could be a contrarian opportunity at the current value.  

Of course, GYG's EBIT is still at a low base. Adding $10 million, for example, of EBIT in FY26 wouldn't be much in dollar terms, but it would represent a 50% increase in percentage terms and help normalise the Guzman Y Gomez EBIT multiple.  

Why GYG shares could still be worth it

GYG is still fairly early on in its growth journey. It plans to add dozens of locations every year in Australia, with expected growth in Asia and North America.

The Mexican fast-food business can benefit from global expansion, even through global franchisee sales, because it owns the brand. However, Domino's can only expand in certain countries.

GYG may be able to deliver much better profit margins in the future because of its focus on drive-through locations, which can deliver good unit economics.

While GYG is starting at an expensive short-term valuation, it may be able to significantly grow its profitability over the next five or 10 years to justify the price today.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Domino's Pizza Enterprises. The Motley Fool Australia has recommended 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.

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