Stock of the Day Just Eat protects its lunch

Stock of the Day: Just Eat protects its lunch

How much?

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.

Cash flow

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.

Market share

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.