GrubHub Inc. (NYSE: GRUB). GrubHub is on track to be acquired by Just Eats Takeaway in early 2021, and GRUB shares are trading near the acquisition price. *We expect GrubHub to benefit from product enhancements and improved restaurant selection, as well as from acquisitions and partnerships with Pizza Hut, Taco Bell and other restaurants. However, we think that margins will be hurt by the higher spending needed to stave off competitors and enter new markets, particularly the small restaurant market. For investors interested in Consumer Discretionary stocks, we recommend the shares of Chipotle Mexican Grill (CMG).
On an adjusted basis, GRUB reported earnings of $0.16 per share, better than the consensus call for a $0.06 per share loss. The adjusted EBITDA margin was almost 9%, down from 16.7%. ‘Daily Average Grubs’ (i.e., meals ordered) rose to 668.6 million, up 46% from the prior year. Gross food sales rose to $2.4 billion.
GRUB shareholders will receive 0.671 Just Eats Takeaway shares for each GRUB share owned. Based on the Just Eats closing share price on June 10, this implies a value of $75.15 for each GrubHub share. GrubHub expects the transaction to close in the first quarter of 2021.
Given its pending acquisition by Just Eat Takeaway.com, GrubHub is no longer providing guidance.
The company continues to increase partnered and nonpartnered restaurant options. In august 2019, Shake Shack and GrubHub entered into a partnership. In April 2019, GrubHub expanded its partnership with Dine Brands to extend coverage to more than 3,000 Applebee’s and IHOP restaurants.
In February 2018, Yum! Brands (YUM) announced that GrubHub would become the exclusive deliverer of KFC and Taco Bell. Under the terms of the deal, YUM purchased $200 million of GRUB stock and the president of Pizza Hut, a division of YUM, joined the GrubHub board.
In October 2017, GrubHub acquired Eat24, an online food ordering service, from Yelp for $287.5 million. GrubHub and Yelp also announced a deal to add orders from GRUB restaurants to Yelp’s local goods and services platform.
In May 2016, GrubHub acquired LAbite, a restaurant delivery service in Southern California; in April 2016, it purchased Bask Labs, which offers a personalized meal recommendation engine for online food delivery. In 2015, the company purchased restaurant delivery services DiningIn, Restaurants on the Run, and Delivered Dish, for a combined $89.9 million in cash and restricted shares.
In August 2013, GrubHub merged with Seamless North America. We note that Seamless was deemed to be the acquirer for financial reporting purposes, though the merged company operates under the GrubHub name.
EARNINGS & GROWTH ANALYSIS
Until the Just Eats acquisition closes, our estimates will remain unchanged. Over the past four years, GrubHub has posted compound annual revenue growth of 56%, adjusted net income growth of 40%, and EPS growth of 17%. However, these returns have been skewed by the August 2013 merger of Seamless and GrubHub, which significantly expanded the size of the company.
For 2021, we are raising our estimate for GRUB, on a standalone basis, to $0.35 from $0.20.
MANAGEMENT & RISKS
Matthew Maloney became CEO after GrubHub merged with Seamless North America in August 2013. Prior to the merger, Mr. Maloney served as CEO of GrubHub Holdings, which he co-founded in 2004 and then led through GRUB’s initial public offering in April 2014. Adam DeWitt has served as the company’s CFO since the merger, and also held this position at GrubHub Holdings prior to the merger. From March 2005 to October 2011, Mr. DeWitt worked at options xPress, serving first as VP of Finance and later as CFO.
GRUB investors face risks related to the growth of the company‘s customer base and the number of participating restaurants, the impact of weak economic conditions on consumer spending, and IT security breaches that could expose the personal information of diners.
GrubHub is a mobile and online provider of restaurant pick-up and delivery orders. The company’s software allows customers to pick up or have their orders delivered from over 300,000 restaurants in more than 3,200 cities throughout the United States as well as in London.
GrubHub is on track to be acquired by Just Eats Takeaway in early 2021, and GRUB is trading near the takeout price. We expect GRUB’s growth to decelerate over the next several years as the company struggles to differentiate itself from a growing number of competitors. Given a more challenging outlook and the frothy valuation attributable to the pending acquisition, we believe that GRUB shares are fully valued at current levels.