Guzman Y Gomez Ltd (ASX: GYG) shares were sold off on Friday.
The Mexican fast-food chain operator's shares sank 14% to $38.58.
Why were Guzman Y Gomez shares sold off?
Investors were selling the company's shares at the end of last week following the release of its half year results.
Although those results revealed strong growth from the Australian segment, the market appears to have been left very disappointed with its performance across the Pacific in the United States.
With Guzman Y Gomez shares trading on sky high multiples, it is clear that there is significant growth being priced in. And much of that future growth is expected to come from the massive United States market.
However, it may not be as easy to crack the lucrative market as many would hope. Especially given the significant competition from rival chains such as Chipotle (NYSE: CMG) and Qdoba.
Should you buy the dip?
Goldman Sachs has been looking over the result and while it acknowledges that some aspects of it were very strong, its analysts still cannot get their head around the company's valuation. They said:
Guzman's 1H25 result was unable to meet investor expectations (stock down 15%), in our view, with strong sales in Australia supported by higher-value/lower-margin Delivery and daypart sales which impacted store level margins. In the US, operations are going through teething challenges while in early stages of brand development in a crowded QSR market.
The broker then named three reasons why it thinks investors should sell Guzman Y Gomez shares now. It adds:
In aggregate, Guzman has strong operational fundamentals, however, we remain cautious based on 1) an overly ambitious long-term store expansion profile; 2) a stretched valuation versus offshore peers; and 3) a stock overhang with c.13% of total shares expected to be released from escrow in early March 2025 and the remaining c.40% in August 2025. Maintain Sell.
According to the note, the broker has retained its sell rating with a slightly improved price target of $36.60.
Based on its current share price of $38.58, this implies potential downside of approximately 13% for investors over the next 12 months. It summarises:
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. While we forecast top-line growth and margin expansion, 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 aggressive store expansion. Separately we note an overhang exists with c.13% of total shares expected to be released from escrow in March 2025.
