As we covered here earlier this week, the company is preparing for an initial public offering (IPO).

The quick service restaurant (QSR) operator is aiming to raise around $242.5 million by offering 11.1 million shares priced at $22.00 each. This will ultimately give the company a $2.2 billion valuation at listing.

But is this excessive? Does it make Guzman y Gomez stock too expensive? Let's find out.

Is Guzman y Gomez stock too expensive?

Tamim, an Australian Share Fund managed by Ron Shamgar, has been running the rule over the IPO.

The fund manager highlights that the company has taken its lead from popular Mexican QSRs like Chipotle (NYSE: CMG) in the United States, but attempts to differentiate itself by using fresh ingredients and its diverse range of restaurant formats and ordering channels.

However, Tamim has called the company's proposed $2.2 billion valuation as "eye-watering" and notes the significant premium that Guzman y Gomez stock will trade at compared to Collins Foods Ltd (ASX: CKF) and Domino's Pizza Enterprises Ltd (ASX: DMP). It commented:

The IPO values GYG at an enterprise value to operating earnings multiple of 32.5 times, significantly higher than Domino's Pizza at around 18 times and Collins Foods Limited at just over 14 times. This rich valuation has raised concerns, especially when compared to the global fast-casual Mexican chain Chipotle, which trades at a multiple of 45 times despite its stronger growth and brand recognition.

But there's more to this valuation than meets the eye, highlights Tamim. This relates to how Guzman y Gomez treats its lease liabilities. It adds:

However, a controversy has emerged around GYG's treatment of lease liabilities in its valuation. Critics argue that by excluding $210 million in lease costs from its operating earnings calculation, GYG can present a much higher estimate of 2025 operating earnings in an attempt to justify a richer valuation multiple. Properly accounting for leases could result in GYG being valued significantly higher on an earnings before interest and tax (EBIT) or a price to earnings ratio.

Should you invest?

In light of the above, the fund manager appears to believe investors should keep their powder dry and wait for a better entry point once the IPO excitement dies down. It concludes:

While GYG's growth ambitions are impressive, investors would be wise to approach this IPO with caution. The rich valuation in comparison to other QSR players raises questions about whether the hype surrounding the offering is justified. The controversy around GYG's treatment of lease liabilities, which could significantly understate its true leverage if properly accounted for, adds further uncertainty.

History has shown that many high-profile IPOs struggle to live up to their lofty expectations once the initial excitement fades. Rather than getting caught up in the frenzy, prudent investors may be better served by waiting on the sidelines to see how GYG's growth story unfolds as a public company. Only then can the true merits of the business be evaluated without the distortions of IPO pricing and promotions. A cautious "wait-and-see" approach could pay dividends for those seeking to invest in GYG for the long haul.

The post Is Guzman y Gomez stock too expensive? appeared first on The Motley Fool Australia.

Yesterday, the RBA hiked interest rates by 25 basis points to 3.35%, with governor Philip Lowe saying "further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary".

That sent the ASX 200 into negative territory as traders priced in the risk of a higher terminal interest rate, and interest rates staying higher for longer.

According to the Australian Financial Review, Commonwealth Bank head of Australian economics Gareth Aird had been expecting the RBA to pause at 3.35%. On Tuesday, he was forced to revise that figure higher to 3.85%, implying two more increases.

The same publication quotes head of market economics at National Australia Bank Tapas Strickland as saying there is now a risk the RBA could increase the cash rates as high as 4.1%.

Earning around 4% on your money, risk-free in a savings account, looks a better bet than investing in a number of ASX blue chips, including…

Source: S&P Capital IQ. Earnings yield is the inverse of the price-to-earnings (P/E) ratio.

Just like tech stock investors ignored valuation as they bid market darlings up to the moon, so are blue chip investors buying at today's elevated prices. 

Any resulting pain won't see share prices of these popular ASX shares plunge 50% or more – these are profitable, dividend-paying companies with sustainable competitive advantages – but the risk is definitely to the downside, especially as the economy slows and interest rates keep edging higher.

2) So if it's not industrial blue chips, where does an Aussie investor plonk their cash?

According to the AFR, although commodity prices broadly have eased from their June 2022 highs, they are still higher than at any stage since 2014, helping propel local resources stocks.

"A combination of supply discipline, China reflating and emerging from their COVID-zero policy and elevated cost pressures suggests strong commodity prices are likely to remain," says Todd Hoare, head of public markets at LGT Crestone.

By contrast to the above valuations, blue chip resources stocks look positively cheap, with BHP Group (ASX: BHP) shares trading on an earnings yield of 12% and a dividend yield of 9.8%. Fellow mining giant Rio Tinto (ASX: RIO) shares trade on an earnings yield of 14.8% and a dividend yield of 9.5%.

Resources shares are notoriously cyclical, something that is reflected in the very modest valuations of those two mining giants. As to whether that still means they are incredible value… well, that's not a game in which I have an edge, nor one I have a desire to play. 

3) Back to interest rates and central bankers…

Overnight in the US, Federal Reserve chief Jerome Powell stuck to his script that US interest rates would need to go higher as the fight against inflation carries on.

Markets initially fell, then rallied strongly as traders – perhaps clutching at straws – noted Powell had the chance to signal he'd be more aggressive in hiking interest rates, but didn't take it.

The tech-heavy Nasdaq Composite jumped 1.9% higher, putting it close to bull market territory. How quickly things can change from bear to bull.

It was only yesterday when the focus was on corporate earnings, and not interest rates, inflation, and sentiment. 

As results continue to roll in for US and Australian companies, I fully expect the focus to return to earnings, particularly outlook statements.

Speaking of which…

In the US, the Chipotle Mexican Grill (NYSE: CMG) share price is down 5% in after-hours trade after the popular burrito restaurant chain said higher costs associated with labour cut into its profit in its most recent quarter, while sales were depressed during the holidays.

Here in Australia, the Amcor PLC (ASX: AMC) share price is down 3.4% after the packaging company gave a more cautious near-term outlook, saying it saw softening in demand for its consumer staples and healthcare end markets and customer destocking through the December quarter.

Earnings season really hots up next week, with JB Hi-Fi (ASX: JBH) – somewhat of a bellwether for consumer discretionary goods – reporting on Monday. 

JB Hi-Fi shares are cheap, trading on an earnings yield of 10% and a dividend yield of 6.6%. We'll find out Monday whether they are cheap for good reason. 

4) In its statement accompanying the RBA's monthly meeting, the Board recognised "monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments".

Today we have somewhat conflicting opinions on talk of a mortgage cliff as fixed-rate housing loans at around 3% roll over into the new standard variable rate of around 6%.

No doubt talking her own book, Australian Banking Association chief executive Anna Bligh said there was a minority of people who were "very stretched" with repayments and that many homeowners had considerable savings buffers, according to the AFR.

"For those people who find it really tough, banks are not going to be sitting there watching people fall off a cliff. They are already working with some of those customers to make different arrangements so that they can get through this period of high-interest rates and get through until interest rates start to stabilise and come down.

"It is in banks' commercial interest to keep people in their homes and get them to keep them there until they've paid off the loan in 25 years' time."

On the other hand, ANZ Bank chief executive Shayne Elliott says a recession in Australia is possible but not likely, and that households are in for a "period of pain" now that the buffer built into mortgage loans has gone, also according to the AFR.

Quoting an interview on 3AW radio, Elliott said "we are at a very difficult pivot point".

"Up to now people have been managing OK… but it's really from here on it gets very difficult because we are over that buffer, and it starts to really bite into people's savings." 

It might be no coincidence that ANZ shares are by far the cheapest of the big four banks, although I'd imagine if one big bank is bracing itself for headwinds, the three others will be too.

The post With interest rates heading higher again, the risk is to the downside for these popular blue chip ASX shares appeared first on The Motley Fool Australia.