At first glance it seems to be business as usual for the shares of the UK’s leading online takeaway service, Just Eat (LSE: JE). However, there could be something going on behind the scenes, as data shows that Just Eat is one of the most traded companies in London today.
Specifically, at time of writing over 16 million Just Eat shares have changed hands today, compared to the company’s average daily volume of around 1m shares.
There are many possible explanations as to why Just Eat could have suddenly become so popular. The most likely explanation is that a fund manager has decided to build up a stake in the company, buying the fund’s holding all in one go. But should you follow suit?
A risky bet
Just Eat’s growth since coming to market early this year has been nothing short of impressive. The company’s recent interim management statement, released at the beginning of November, showed that total orders in the three months to 30 September increased by 56% compared to the year ago period.
Just Eat is also expanding rapidly around the world. During the quarter the group created the clear market leader in the Brazilian online delivery food market by establishing a joint venture with the Brazilian operator, iFood. What’s more, Just Eat consolidated its leading position in the French online takeaway food market acquiring control of Alloresto.fr.
Still, even though Just Eat is growing rapidly, if you want to get your hands on the company’s shares you’re going to have to pay a premium price. Indeed, the company currently trades at a forward P/E of 104, a lofty valuation that could scare many investors away.
That being said, with City analysts currently predicting earnings per share growth of 327%, Just Eat currently trades at a PEG ratio of 0.3, indicating growth at a reasonable price. Forecasts for 2016 indicate that Just Eat is trading at a 2016 P/E of 60.
Unfortunately, these eye watering valuations do not leave much room for error. If Just Eat fails to meet the City’s lofty growth expectations then the company’s shares could plummet.
Cash generation
One of Just Eat’s most attractive qualities is the group’s cash generative nature. In particular, like many online businesses Just Eat’s overhead costs are low, so the company is able to convert most of its profit into cash and there’s almost no need for heft capital spending. During the first half of the year the group generated nearly £15.4m in cash from operations, nearly 200% of profit before tax.
Overall, Just Eat reported a net cash balance of approximately £154m at the end of the first half, around 27p per share. With this large and growing cash balance, the sky’s the limit for Just Eat.
It’s up to you
All in all, Just Eat’s rapid growth and hefty cash balance make the company look like a great investment. However, the company’s lofty valuation is concerning and the shares could quickly fall back to earth if Just Eat fails to meet City predictions.
