The Guzman Y Gomez Ltd (ASX: GYG) share price has almost doubled from its initial public offering (IPO) price of $22 to today's $40, as the chart below shows. It's up 6.6% today, compared to a fall of 0.04% for the S&P/ASX 200 Index (ASX: XJO).
Guzman Y Gomez has delivered an amazing performance since listing on the ASX, considering some investors called its IPO share price 'expensive'.
But just because a valuation has been deemed high doesn't mean it can't continue to rise (significantly).
If an expensive company reports trading updates and results that are strong, it can justify its valuation. The financial numbers may even outperform the already-high expectations.
Let's look at what one expert thinks of the Mexican fast-food business.
UBS upgrades rating on Guzman Y Gomez shares
In a note this week to clients, UBS changed its rating on the business from sell to neutral. It also increased its 12-month price target from $37 to $40.
With the Guzman Y Gomez share price at $40.88 at the time of writing, the company has already exceeded the $40 price target.
The broker has increased its operating profit and earnings per share (EPS) estimates for FY25, FY26 and FY27 due to expectations of higher same-store sale (SSS) growth and stronger operating profit (EBITDA) margins.
With the potential for the company to achieve stronger earnings than expected, UBS suggests that "the risk-reward is more balanced despite the elevated" valuation multiple.
The broker said key drivers of GYG's SSS are menu innovation (including breakfast and coffee, and value offers), more sales in early and late times of the day and delivery growth.
UBS also said it remains "confident in the long-term potential for net new store growth" because of property team investment and attractive economics, with 15 new stores expected in the first half of FY25 and 31 guided for FY25.
In terms of the adjusted EBITDA to net margin, it's forecast to rise from 4.8% in FY24 to 6% in FY25 and 6.9% in FY26. UBS expects further margin expansion after FY26. UBS explained:
The key drivers of expansion are operating leverage (SSSg ahead of rental, labour & other costs; GYG having invested ahead of the curve [e.g. culinary & operations team]) and improving franchisor economics.
A question for GYG is how these tailwinds will be utilised; margin expansion vs redeployment back into the business (e.g. price, further investment).
Forecast for FY25
The broker projects that in the 2025 financial year, Guzman Y Gomez could generate $450 million in revenue, $30 million in earnings before interest and tax (EBIT), and $19 million in net profit.
In FY29, UBS forecasts GYG's revenue and net profit at $1.03 billion and $122 million, respectively. Time will tell if this helps the Guzman Y Gomez share price in the long term.
