Guzman y Gomez (ASX: GYG) shares have been a hot topic among ASX investors following their successful initial public offering (IPO).
Since its listing, the stock has surged more than 20% into the green and now trades at $26.52 apiece. But the room is split on what to do with GYG shares from here.
With the buzz around this Mexican fast-food chain, it's worth exploring why GYG shares might be a good addition to your portfolio—and one reason you might want to hold off. Here's what the experts are saying.
Should you consider buying GYG shares?
GYG shares were all the rage in the first half of CY 2024. They were also a key contributor to the June returns of Firetrail Investments' Absolute Return Fund.
In its monthly report, the firm said GYG was a "positive contributor" to its June return of 2.75%, bringing its second-quarter return to 7.3%.
The investment management boutique outlined four reasons for owning GYG shares.
1. Strong financials underneath GYG shares
Firetrail says Guzman y Gomez has shown impressive growth, with network sales compounding at nearly 30% annually over the past decade.
The company now operates 210 restaurants globally, with 70% as franchises and 30% as corporate stores.
This franchise model is highly profitable, with a typical GYG drive-thru turning over approximately $6 million annually and boasting a 22% profit margin. This is one reason it owns GYG shares.
These restaurant economics place GYG second only to McDonald's in Australia, Firetrail says:
With an average build cost of $2 million, a new corporate GYG store generates an approximately 60% return on investment and pays itself off in just over 18 months.
We expect restaurant performance to continue to improve over time as ongoing same-store-sales growth drives operating leverage on a relatively fixed cost base
2. Significant growth potential
GYG currently has fewer than 200 stores in Australia but envisions the potential for over 1,000, with plans to open 30-40 new stores annually. Firetrail says this gives the company a 20-year growth runway in Australia alone.
It says this expansion is underpinned by the solid performance of existing stores, with ongoing same-store sales growth driving operating leverage.
As it stands, McDonald's and Subway are the only two major quick service restaurant (QSR) companies with more than 1,000 stores (1,031 and 1,227 each, respectively).
3. Expansion opportunities abroad
It's not just the Australian market that supports Firetrails' investment thesis on GYG shares. The company has global ambitions, too.
GYG operates a small number of restaurants in Singapore and Japan and has begun expanding in the USA. Although it's early days, "the prize is large," it says and is confident in the brand's international appeal.
We believe the investment thesis is underpinned by the Australian opportunity alone. However, management have global ambitions. The company has a small presence in Singapore and Japan today. Both markets could be materially larger over time.
Additionally, GYG has opened 4 restaurants in the USA and intends to open an additional 3-5 each year to prove out the brand appeal and unit economics.
4. Healthy franchisee network
A key strength of GYG is its profitable franchisee network, Firetrail says. Every GYG franchisee is currently profitable, with the median franchisee making a 50% return on investment.
This is "underpinned by a simple and transparent royalty model which ensures franchisees are treated fairly".
The fund manager believes this trend drives a strong incentive to open new stores, ensuring a steady stream of royalty income for GYG.
"Unsurprisingly, the waitlist to become a franchisee is long", it concluded.
One reason to potentially sell GYG shares
Despite the strong growth prospects, some analysts believe GYG shares are overvalued. Bell Potter recommends to sell the stock as it may be overvalued.
According to The Bull, Bell Potter analyst Christopher Watt says that investors may "want to consider trimming their positions to pocket some profits".
He said GYG shares gave a "handsome windfall" on their first day on the ASX, closing the session at $30 after the initial public offering at $22.
Watt added:
We like the business, but believe the August 2024 reporting season will more than likely highlight a challenging year ahead for restaurants and discretionary retailers.
Time will tell which broker got it right.
Foolish takeout
GYG shares delivered gains for many investors in the first half of CY 2024. However, potential investors should be mindful of the current high valuation and the associated risks.
If GYG can continue to execute its growth strategy effectively, its shares could offer substantial returns in the long run. Always remember to conduct your own due diligence and that past performance is no indication of future results.
