Guzman y Gomez’s recent announcement of a potential $100 million on-market buyback has drawn scrutiny from Morningstar. This follows the Mexican-themed fast-food chain’s report of an 18.6 per cent increase in sales for the September quarter. Guzman y Gomez is a fast-casual restaurant chain specialising in Mexican cuisine, committed to fresh ingredients and authentic flavours. The company is rapidly expanding both domestically and internationally, aiming to bring its unique dining experience to a global audience.
The company reported sales of $330.6 million for the first quarter, fuelled by growth in Australia and its emerging United States business. Comparable sales saw a 4 per cent rise in Australia and a 6.7 per cent increase in the US market. Despite this positive sales momentum, Morningstar equity analyst Johannes Faul has voiced reservations about the buyback strategy.
Faul maintained his fair value estimate for Guzman y Gomez stock at $16, suggesting a potential price decline of nearly 40 per cent from its Thursday closing price of $26.39. He also estimated that only a small fraction of shares, around 4 per cent, would be repurchased. “The buyback is perplexing,” Faul stated, highlighting the company’s equity issuance of $200 million at $22 per share just 15 months prior.
Faul also expressed concerns about the company’s valuation, noting that shares are trading at approximately 100 times next year’s earnings. He cautioned that the market may be overly optimistic about Guzman y Gomez’s international expansion, particularly in the competitive US market, where he believes the company’s US stores will not achieve meaningful profitability within Morningstar’s 10-year forecast period.
