Guzman Y Gomez Ltd (ASX: GYG) shares have been strong performers since listing on the Australian share market earlier this year.
However, one leading broker is calling time on this rally and is urging investors to hit the sell button today.
Time to sell Guzman Y Gomez shares
According to a note out of Goldman Sachs, its analysts think the quick service restaurant (QSR) operator's shares could be overvalued at current levels.
This morning, the broker has initiated coverage on the company's shares with a sell rating and $33.20 price target.
Based on its current share price of $39.26, this implies potential downside of approximately 15.5% for Guzman Y Gomez shares over the next 12 months.
Although the broker acknowledges that Guzman Y Gomez is a high-quality QSR operator, it thinks the market is too ambitious on its growth expectations.
In addition, it highlights that there will be a significant number of shares coming out of escrow in the near future that could end up being sold.
Commenting on its sell rating, the broker said:
We consider Guzman to be a high quality QSR operator with multiple levers available to grow operations, as well as a high likelihood of exceeding FY25 prospectus forecasts. However, the basis of our Sell thesis is centered on 1) an overly ambitious long-term store expansion profile that has no recent successful precedent in the Australian market; and 2) a stretched valuation that has, inappropriately in our view, been pegged to the highest growth US-peers without taking into consideration the market differences and risks associated with an accelerated store expansion. Separately we note an overhang exists with c.13% of total shares expected to be released from escrow in March 2025 and the remaining c.40% in August 2025.
Instead of Guzman Y Gomez shares, Goldman is recommending another QSR operator.
Buy this stock instead
This morning, Goldman has also initiated coverage on KFC restaurant operator Collins Foods Ltd (ASX: CKF).
It has commenced coverage with a buy rating and $10.00 price target. This implies potential upside of almost 16% for investors from current levels.
It believes that the company's outlook is becoming more positive, which could make now the time to buy. It said:
Like many consumer companies, Collins has been unable to escape the rising cost and tough consumer environment which led to recent margin downgrades. However, we consider the outlook to be incrementally more positive with our Buy thesis centered on 1) a moderation of cost growth with wages, poultry, electricity and rent growth moderating, while oils and grains have returned to pre-covid levels; 2) improved discretionary spending in Collins' key states (Qld & WA) and potential for increased Digital sales penetration; and 3) Netherlands KFC presence reaching scale and improved KFC Europe margins long-term.
