Guzman y Gomez Ltd has received a sell rating from analysts at Goldman Sachs (NYSE:GS) due to its "overly ambitious" store expansion plans and an "inappropriately" high valuation.
In a note to clients, the broker mentioned a cautiously optimistic outlook for the quick-service restaurant (QSR) sector, factoring in positive consumer sentiment driven by favourable interest rate expectations, tax cuts, population growth and forecasts of rising disposable income.
Goldman Sachs analysts believe the QSR sector is set for growth following a period of high inflation and supply chain disruptions, which could support profit margins as sales improve. The broker maintains buy ratings for other QSR operators like Collins Foods (KFC) and Domino’s, but expressed concerns about Guzman y Gomez’s strategy.
Despite recognising Guzman y Gomez as a high-quality operator with potential to surpass its FY25 forecasts, Goldman Sachs cited two key reasons for the sell rating: the rapid store expansion, which targets a rate more than double the 10-year historical average for QSR peers in Australia, and its stretched valuation.
Guzman y Gomez reported a statutory net loss of $13.7 million for 2024 but showed pro forma net profit growth of 94% to $5.7 million, exceeding forecasts.
Ambitious expansion plans
Guzman’s long-term value proposition is anchored in its ambitious expansion plans, with a near-term goal of opening 30 stores annually, scaling up to 40 stores per year within five years. Over the next two decades, the company aims to establish 1,000 stores across Australia.
The report highlights that McDonald’s took approximately 35 years to expand from 200 to 1,000 stores in Australia.
“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.
US QSR value
The US quick service restaurant (QSR) market was valued at US$388 billion (A$565 billion) in 2023, significantly larger than Australia's market, which was estimated at US$14 billion. This size disparity allows for greater long-term store targets and faster expansion rates in the US. The US market is also less concentrated, with the top five QSRs holding a 29% market share compared to 51% in Australia.
According to a Goldman Sachs report, US QSR operators have an inherent "survival bias," representing successful global brands in a more competitive and established environment.
Goldman Sachs also highlighted the potential impact of escrowed shares on Guzman y Gomez's stock rating. Around 13% of the total shares are expected to be released from escrow in March 2025, with the remaining 40% scheduled for release in August 2025.
Despite this, shares in Guzman y Gomez fell more than 4% to $37.37 following the Goldman Sachs report. However, this still represents a nearly 70% increase from its ASX listing price of $22 on 20 June.