The Guzman Y Gomez Ltd (ASX: GYG) share price has been an excellent performer for investors, rising by 33% from the $30 it achieved on the first day of trading on 20 June 2024.
Luckily, I decided to buy some shares at around $25 in July 2024. The valuation is now a lot higher, so is now the right time to invest in the Mexican fast-food operator?
On the one hand, great businesses have a habit of continuing to win. It would have been a mistake up until now to underestimate names like Pro Medicus Ltd (ASX: PME), WiseTech Global Ltd (ASX: WTC), Xero Ltd (ASX: XRO) or other long-term winners.
However, I don't think investors should buy shares in a company at any price. We need to decide based on the business potential. Time will tell whether the valuation can be justified.
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Strong growth
Guzman Y Gomez is a fast-growing company. Its soaring revenue is one of the main elements justifying this higher valuation.
In the first quarter of FY25, it reported network sales growth of 20.7%, with comparable sales growth across Australia, Singapore and Japan of 8.7%. In other words, its existing restaurant network is growing at a good pace, and total sales are benefiting from the ongoing rollout of more locations.
Also in the first quarter of FY25, the company reached 226 global locations, an increase of 22 year over year (or 10.8% in percentage terms).
If Guzman Y Gomez can continue to grow its network sales at a compound annual growth rate (CAGR) in the double digits (in percentage terms) for the foreseeable future, I'd say Guzman Y Gomez shares have a very promising future.
Profitability improving
I believe one of the most important things a good company needs to do over time is grow its bottom line and increase its profitability metrics.
In FY24, the business saw network sales rise 26.4% to $959.7 million, underlying operating profit (EBITDA) grow 52.9% to $44.8 million, and underlying net profit after tax (NPAT) jump 94.1% to $5.7 million. Each of those numbers, particularly the profit numbers, was better than the company had forecast in its initial public offering (IPO) prospectus.
The fact that profit rose faster than network sales is a sign that its profit margins increased. I'm not going to be too obsessed about how much profit margin rise in FY25, or in any particular year, but I believe GYG's profit margins will keep rising over time thanks to scale benefits as it grows.
In the IPO forecast, GYG suggested its FY25 EBITDA to global network sales margin would increase from 4.5% to 5.3%. It actually achieved a 4.7% margin in FY24, so just achieving the forecast 5.3% margin in FY25 would still represent a material increase in profitability from the last financial year.
Long-term growth plans
With rising sales per restaurant and growing profit margins, the outlook looks good. The key question is – how large can GYG become? The market is already suggesting the company has an impressive future with how high the Guzman Y Gomez share price has gone.
In the IPO, the company said it saw an opportunity to reach more than 1,000 restaurants in Australia over the next 20 or more years. It plans to increase its openings to 40 restaurants per year within five years. At the end of the FY25 first quarter, it had 199 Australian stores, so there's plenty of suggested growth.
The business also has a small but growing presence in Singapore, Japan and the United States. If GYG can succeed in Singapore and Japan then that offers a lot of potential sales and profit growth. Japan has a much larger population than Australia. I think GYG could continue expanding to other countries in the future, but there's no rush.
Overall, I think its long-term growth plans can somewhat justify today's high valuation. However, I wouldn't be surprised if there was an opportunity to buy Guzman Y Gomez shares at a better valuation this year or even within the next month. I'd prefer to be patient for now on investing for my portfolio and look at other opportunities first.
