Guzman Y Gomez Ltd (ASX: GYG) shares have seen a lot of volatility since listing a month ago, with some investors attracted to the company's growth potential and others cautious about the stock.
The GYG share price is still 21% higher than its initial public offering (IPO) price, but it has dropped more than 12% from the $30 it was trading at on 20 June 2024, as shown on the chart below.
Investors can decide whether the company is a good buy today, but I believe there are three things that people should keep in mind.
Valuation
The valuation of a business is an extremely important factor when it comes to making the right investment decision.
GYG is not making large profits right now, so the current market capitalisation does seem elevated. Guzman y Gomez shares have a market capitalisation of $2.75 billion, according to the ASX.
For FY25, the business has guided that it expects to make $59.9 million in earnings before interest, tax, depreciation and amortisation (EBITDA) and $6 million in net profit after tax (NPAT).
This means GYG shares are currently trading at 46x FY25's estimated EBITDA and 458x FY25's forecast NPAT. Those are not cheap numbers.
However, a relatively small amount of additional profit can quickly reduce the earnings multiple. For example, if GYG's NPAT was $10 million in FY26, the forward price-earnings (P/E) ratio would drop to 275. It's still not cheap at all, but it shows that ongoing profit growth could improve the picture.
According to the estimates on Commsec, the GYG share price is valued at 108x FY26's estimated earnings.
Franchisee return on investment
I believe one of the most important factors to make a successful franchise business is the profitability and sustainability of franchisees.
If franchisees are making good money, they'll not only stay in business but may also want to open more locations. According to Guzman y Gomez, its approach to franchising has underpinned the health of the franchise network. In Australia, all franchisees made a profit/annualised franchisee return on investment (ROI) in the first half of FY24, with the median franchisee ROI being 51%.
I think this bodes well for the profitability of future restaurants.
GYG has a mixture of corporate stores and franchisees in Australia. The business believes "that it has substantially built the team, restaurant pipeline, and infrastructure to be able to open 30 new restaurants per annum over the near-term, increasing to 40 restaurants per annum within five years."
Improving metrics
GYG may be seeing strong network sales growth and a growing number of locations, but its underlying metrics for each restaurant are going in the right direction, which could help Guzman y Gomez shares.
Despite the painful level of inflation and a higher cost of living impacting households, GYG's existing locations are delivering strong comparable sales growth. According to GYG, the business achieved comparable sales growth of 15% in FY23 and 10.6% in the first half of FY24.
Profit margins are also increasing. GYG said that the comparable restaurant margin was 15.5% in FY20, 17.7% in FY23 and 20.9% in the first half of FY24.
If existing locations keep selling more food and achieving a better profit margin, then the future looks bright for the ASX share's financials.
