Stock of the Day: Just Eat protects its lunch
Just Eat shares’ biggest ever drop is a reminder of how difficult it is to value. The £5.8bn group said it needs to spend £50m to shore up UK, Canada, Australia and New Zealand delivery capability. But to make that investment, Just Eat had to offer Ebitda guidance between £165m and £185m, compared to the £226m the market was expecting.
On the road
The stock fell as much as 15% on Tuesday as investors scrambled to sidestep the gaping divide to book value—five times lower. Fair enough, but the sharp spike in anxiety shows obvious risks slipped investors’ minds. Just Eat is after all still partly reliant on technology that has low barriers to entry—delivery by road. In theory, that means it will frequently have to choose between spending on higher delivery capacity and risking market share loss. The conundrum should call the credibility of its soaring valuation into question more frequently. Note shares have traded at 35 times 2018 earnings of late.
To be sure, Just Eat’s market value is tamer than many of its rivals’. Domino’s Pizza UK trades at a book value that assumes 11.7 times 2018 earnings, more than twice Just Eat’s. Yet Just Eat generated more cash than its pizza-focused competitor last year and is forecast to do so again this year. JE’s 2018 operating profit was forecast to jump 40% t0 £175m. Unfortunately, it’s that 40%— or £50m—that has now been earmarked for delivery expansion; as opposed to a helping to fund a share buyback, perhaps.
Still, Just Eat has confounded in the past. With the help of an enviable market position it could grow faster than expected again. Britain’s online fast-food market is forecast to more than double from £3.6bn in 2017 to £8.53bn by 2022, according to data published by Statista. Some 80% of that market share belonged to Just Eat after it acquired market No.2, Hungry House, in 2017. In effect, Just Eat also bought some breathing space. Rivals will face a hard slog catching-up anytime soon. At some point though, either the group’s platform model (sans mopeds, etc.) proves viable for the long-term on a standalone basis, or Just Eat will have to become just another food delivery firm—with a discount to match.
Thoughts on Just Eat share price chart
The shares on Tuesday ended about seven months of orderly gains, depicted by the rising channel in place since August. The downside incursion last month was a warning. A clean break followed by Tuesday’s unhealthy looking candle suggests there will be no easy reinstatement of the buying consensus. At least prior resistance that turned into support in October (759p) was holding again at the time of writing. The stock was also cushioned by at its 200-day moving average (blue line) which continues to trend upwards. That uptrend and sentiment could probably even survive a breach, with another corroborated floor visible near 686p. Probabilities of a trend change will notch higher though, if these thresholds give way.
Just Eat Plc. share price chart – daily intervals
Source: Thomson Reuters and City Index
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.