Goldman Sachs triggers sell rating for Guzman y Gomez

The Mexican fast-food chain has been added to the sell basket over its ‘overly ambitious’ store expansion plan, ‘inappropriately’ pegged stretched valuation and a stock overhang.

Mexican food chain operator Guzman y Gomez’s “overly ambitious” store expansion plans, which have no recent precedent in Australia, and its “inappropriately” pegged stretched valuation have triggered a sell rating from analysts at Goldman Sachs.

In a note to clients, the broker said it was cautiously optimistic about the quick-service restaurant (QSR) outlook and its latest stock call on Guzman y Gomez balanced industry dynamics and company-specific opportunities against near-term factors and valuation.

Consumer sentiment is trending positively, as interest rate expectations and recent tax cuts are factored in alongside population growth and a forecast return to growth in real disposable income and consumption.

The growth outlook for QSRs is also positive after a period of elevated inflation and disrupted supply chains and that will support margin expansion as sales and volumes improve.

Goldman Sachs’ latest report has buy ratings for KFC owner Collins Foods and Domino’s.

In the report, Goldman Sachs analysts Elijah Mayr Chris Gawler and Elise Bailey considered Guzman y Gomez to be a high quality QSR operator with multiple levers to grow operations. There’s also a “high likelihood” the group will exceed its FY25 prospectus forecasts.

Last month, the Steven Marks-led group reported a statutory net loss of $13.7m for 2024, as expected, but pro forma net profit rose 94 per cent to $5.7m – 71.2 per cent ahead of prospectus forecasts.

But in the case of Guzman y Gomez, there are two factors underpinning its sell rating and target price of $33.20.

First, its store rollout plan is targeting an open rate of more than two times the historical 10-year average of Australian QSR peers.

Guzman y Gomez founder and chief executive Steven Marks wants to do what few Aussie QSRs have done before, according to Goldman Sachs analysts. Picture: Britta Campion.

The fundamental driver of Guzman’s long-term value proposition is the prospectus target of 30 stores per annum over the near-term, increasing to 40 stores a year within five years and a long-term target of 1000 stores in Australia over the next 20+ years.

The report notes McDonald’s has taken around 35 years to go from 200 to 1000 stores in Australia.

Mr Mayr and his colleagues see these targets as “overly optimistic” because of a limited precedent in the Australian market for a sustained store rollout the size Guzman is targeting. It also has a history, much like other leading QSRs, of missing store expansion targets, typically due to developer delays, franchisee complications, weather events and/or overly ambitious targets.

There’s also the elevated competition for quality sites given store rollout targets from new and existing brands (particularly for drive-through format) which may increase industry development and rental costs.

They also note that “any evidence of missed store targets may not eventuate until FY26/27”.

The second issue, according to Goldman Sachs, is Guzman y Gomez’s stretched valuation that has been “inappropriately” pegged to the highest growth US peers without taking into consideration the market differences and risks associated with an accelerated store expansion.

“While strong near-term earnings growth screens well for Guzman, we consider the US peers to have a significantly greater long-term market opportunity,” the note states.

The US QSR market was valued at $US388bn ($565bn) in 2023, more than 27 times that of Australia (estimated at $US14bn), enabling greater long-term store targets and a higher rate of store expansion. The US market is less concentrated with the top 5 QSRs holding 29 per cent share versus 51 per cent in Australia. US players also have an “inherent survival bias and represent the most successful global brands in a more established and competitive market”, the Goldman Sachs report notes.

The overhang in terms of escrowed shares is also a weight on its rating by the broker. About 13 per cent of total shares are expected to be released from escrow in March 2025 and the remaining 40 per cent in August 2025.

Shares in Guzman y Gomez fell more than 4 per cent to $37.37 in afternoon trading on the Goldman Sachs’ report – but that’s still an increase of nearly 70 per cent on its ASX listing price of $22 on June 20.

Originally published as Goldman Sachs triggers sell rating for Guzman y Gomez