Why I invested in Guzman Y Gomez (GYG) shares this week for the long-term

I recently invested in Guzman Y Gomez Ltd (ASX: GYG) shares for my portfolio for a few compelling reasons.

Let me say upfront that this buy was a minimal starting investment. Before the initial public offering (IPO), I was thinking about investing at the IPO price of $22. The Guzman Y Gomez share price soared to $30 on the opening day, causing me to decide to wait for a better price.

Perhaps unsurprisingly, and luckily for me, the GYG share price had dropped 17% by 1 July 2024. I decided to make a small investment when it hit the $25 mark. The price may fall further. I’d be interested in buying more if it did slip to a better valuation.

Why I decided to buy Guzman Y Gomez shares

Over the years, I’ve regularly written that one of the most helpful elements in helping an ASX share deliver strong returns is international growth. Australia has a relatively small population, whereas Asia, the United Kingdom, continental Europe, and North America are regions that can unlock much more growth potential.

GYG already has a small presence in three other countries outside of Australia – the United States, Singapore and Japan.

The Mexican fast-food business has 16 restaurants in Singapore and five in Japan, owned and operated by separate master franchisees. The ASX share earns royalty revenue from franchisee sales. It also has four corporate restaurants in the US.

At the latest count, GYG had 185 locations in Australia, with 62 corporate restaurants and 123 franchise restaurants. It plans to open 30 new restaurants in FY25 and increase its annual openings to 40 per year within five years.

Guzman Y Gomez has made significant progress over the last several years. In FY15, it made $101 million in global network sales, which increased to $759 million in FY23. This represents a compound annual growth rate (CAGR) over that time period. It expects another 50% growth of global network sales to $1.14 billion by FY25.

If the business grows its global network sales at a CAGR in the double-digits by 2030, I think it has an exciting future. As the owner of the GYG brand, the ASX share can benefit from global expansion, even if done through franchisees. I hope Guzman Y Gomez can expand into new countries in coming years, such as New Zealand and the UK.

Impressively, the business reported comparable restaurant sales growth in Australia in the double digits in FY22, FY23 and the first half of FY24. This bodes well for the ongoing growth of existing stores and justifies more locations across the country for the coming years.

If comparable store growth can remain comfortably above inflation, I’ll continue to be optimistic about Guzman Y Gomez shares for the long term.

Rising profit margins

Rolling out more locations can help grow its revenue. But the key reason why I think today’s GYG share price could be appealing for the long term is the potential for rising profit margins.

It’s true that the company is not priced cheaply. Even the $22 IPO GYG share price was judged by many market investors to be expensive. And there are many growth expectations built into the value.

However, I expect the company’s margins to significantly lift in the coming years, so profit can rise faster than revenue (which is predicted to rise quickly). Investors usually judge profitable businesses by their net profit capabilities.

GYG expects its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to global network sales margin to increase from 3.9% in FY23 to 4.5% in FY24 and then rise to 5.3% in FY25.

I think margins can continue to rise as the company adds more stores globally, with improving same-store sales helping increase the value of each location for GYG and franchisees.

The post Why I invested in Guzman Y Gomez (GYG) shares this week for the long-term appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Guzman Y Gomez. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.