Did someone say Guzman y Gomez?

A word or two might have been written about the Mexican food chain’s extraordinarily hyped debut last week, but KFC franchisee Collins Foods (ASX:CKF) on Tuesday reminded investors that Guzman y Gomez (ASX:GYG) is not the only listed fast food joint in town.

The operator of 279 of about 750 KFC outlets in Australia – as well as the hitherto underperforming Taco Bell chain – Collins Foods served up an appetising 15.6 per cent boost in underlying net profit to $60 million, on record turnover of $1.49 billion (up 10 per cent).

However, consumer sentiment is weighing down like a dodgy Zinger hot and crispy double box and same-store growth has been negative for the first seven weeks of the current financial year.

Investors were unsure what to make of the result, with the stock bounding 7 per cent in immediate response but sagging 9 per cent the next day.

Investment bank Jarden describes a “mixed outlook with near-term challenges but long-term opportunity” – which sounds about right.

Jarden provides fresh valuation metrics to compare the stock against Guzman y Gomez. Given Guzman y Gomez shares listed at a 36 per cent premium, investors might be feeling queasy(dilla) about having missed out on the $2.2 billion debut.

We’re no fan of the George Mallory ‘because it’s there’ rationale – and not just because he died on his Everest ascent (or descent).

So how do the relative numbers stack up?

On revised broker estimates, Collins Foods trades on a multiple of around five times expected earnings before interest tax and depreciation (ebitda) for the 2024-25 year, compared with around 42 times for Guzman y Gomez.

Domino’s Pizza Enterprises (DMP) trades on 2024-25 multiple of around 10 times, but expectations may change in the lead up to the group’s full-year results in August.

Of course, earnings multiples aren’t the be-all-and-end-all if an ‘expensive’ stock has superior growth prospects.

There’s little doubt that Guzman y Gomez is both well-run and fast growing, with its healthier offerings gaining traction with younger consumers. Since entering the local market the chain has gone off like a jalapeno stuffed burrito, having expanded from 53 stores a decade ago to 185 stores.

“The crown jewel in Guzman’s story … is its projected rapid growth,” says IG Markets analyst Hebe Chen.

“Guzman y Gomez anticipates opening 30 new restaurants in 2024-25 and aims to increase annual openings to 40 per year within the next five years, reaching 1,000 Australian locations in 20 years. That’s a feat only achieved by McDonald’s and Subway in Australia.”

If Guzman y Gomez were to achieve this, its shares would be a better bargain than a 50 cent burrito.

Putting on the villain hat, pre-IPO Morningstar raised eyebrows (and sombreros) by valuing Guzman y Gomez shares at a mere $15.

In a lengthy treatise the firm this week doubled down, claiming Guzman y Gomez would need to open 7,320 stores in the next decade to justify the growth assumptions.

“We see more attractive valuations in … Domino’s and Collins Foods, both trading at discounts of around 40 per cent to our fair value estimate.”

Domino’s shares have lost one-third of their value after an uninspiring January 24 trading update and the jury’s out on whether this decrement adequately compensates for the group’s offshore problems, especially in Japan.

Perhaps Guzman y Gomez is a case of buying on dips: not the guacamole ones but a potential share price after pre-IPO investors cash in their chips (not the corn ones).


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