Digital Orders And Remodelings Will Unlock Urban Opportunity

Key Takeaways

• Ongoing digitalization, store remodelings, and technology investments are strengthening customer engagement, operational efficiency, and supporting sustainable margin and revenue growth.
  
• Strategic brand portfolio optimization and margin enhancement initiatives are stabilizing earnings, diversifying revenue, and helping offset macroeconomic and inflationary pressures.
  
• Weak performance in key brands, rising costs, higher debt, intense competition, and execution risks threaten profitability, revenue growth, and financial stability.

Catalysts

Operates restaurants in Latin America and Europe.

• Strong sales momentum and sustained recovery in flagship brands (Starbucks, Domino's, Full-Service Restaurants) in Mexico, Spain, and Colombia-backed by disciplined organic expansion and ongoing store remodelings-are positioning Alsea to capitalize on increased middle-class consumption and urbanization trends, driving forward-looking revenue and same-store sales growth.
  
• Rapid digitalization, evidenced by digital orders representing 38.6% of sales and over 8 million active loyalty users, is expanding Alsea's sales channels, enabling personalized marketing and higher frequency, which should boost both revenue and incremental gross margin as digital adoption rises further.
  
• Increased capital allocation to remodeling and technology upgrades (2:1 remodelings to new openings and one-third of CapEx dedicated to tech/process improvements) is expected to enhance customer experience and operational productivity, supporting structural margin expansion and improved EBITDA over the medium term.
  
• Strategic portfolio optimization, including the exit of underperforming assets and entry into high-potential new brands (e.g., Chipotle) and segments, will reduce earnings cyclicality, stabilize long-term earnings, and diversify revenue-helping the company to outperform peers in fragmented and competitive markets.
  
• Margin enhancement initiatives-such as centralized procurement, productivity gains via automation, and SG&A efficiency-are being prioritized to offset inflationary pressures and labor cost increases, ultimately supporting stable-to-improving net margins and free cash flow generation in the context of cost volatility.

Alsea. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alsea. de's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 4.7% in 3 years time.
• Analysts expect earnings to reach MX$5.0 billion (and earnings per share of MX$4.69) by about July 2028, up from MX$1.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as MX$3.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, down from 27.0x today. This future PE is lower than the current PE for the MX Hospitality industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.66%, as per the Simply Wall St company report.

Alsea. de Future Earnings Per Share Growth

Risks

• Persistent underperformance in key brands and geographies, particularly Burger King in Mexico and Chile and ongoing traffic declines in Argentina, imply that not all parts of the portfolio are responding to management initiatives, which could weigh on overall revenue growth and earnings in the longer term.
  
• Margin pressure from rising labor costs, input cost inflation (especially commodities like coffee, beef, and cheese), and currency volatility-especially the depreciation of the Mexican peso and volatility in key South American markets-could constrain profitability and erode net margins.
  
• Alsea's increasing gross and net debt levels, coupled with aggressive store opening and remodeling strategies, elevate financial risk, which could lead to higher net interest expense and reduce net earnings, especially if economic conditions worsen or free cash flow declines.
  
• Competitive intensity in quick service and casual dining segments remains high, with risks of rising aggregator fees from delivery platforms and fragmentation from local, independent, and virtual brands; these trends could diminish Alsea's pricing power and traffic, thus suppressing revenue and margins.
  
• Portfolio optimization and capital allocation efforts-even if disciplined-carry execution risks, such as difficulties in rationalizing underperforming assets or integrating new brands, which may cause uneven returns on investment and impact both earnings stability and free cash flow.

Valuation

• The analysts have a consensus price target of MX$59.0 for Alsea. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$75.0, and the most bearish reporting a price target of just MX$47.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$106.3 billion, earnings will come to MX$5.0 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 20.7%.
  
• Given the current share price of MX$55.9, the analyst price target of MX$59.0 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.