Shares in online takeaway delivery service Just Eat (LSE: JE) have fallen by up to 6% today. The company has reported a slowing down in its growth rate in the final quarter of the year. While disappointing, it expects to post full year results in line with expectations. Looking ahead to 2017, it remains confident in its outlook. Could this be the perfect buying opportunity?
Although Just Eat’s growth slowed in the fourth quarter, it was still hugely impressive. Reported sales for the group rose by 42%, while in the UK they were 31%. Like for like (LFL) sales increased by 36% on a group basis and by 31% in the UK. These figures show that the company continues to enjoy high demand for its service, which bodes well for its future growth.
In fact, in 2017 it’s expected to record a rise in its bottom line of 48%, followed by further growth of 33% next year. This is clearly a stunning growth rate and puts the company on a price-to-earnings growth (PEG) ratio of just 0.7. This indicates that it offers a wide margin of safety so that if its financial performance misses expectations, its shares may still perform relatively well. As such, its risk profile is attractive, which increases the overall investment appeal.
Just Eat’s risk profile is further reduced by its geographical exposure. It operates in multiple regions and so if one region disappoints then it should be able to offset this to a degree by better performance elsewhere. However, its business model has thus far proven to be highly successful. Over the medium term this should continue to be the case, since the trend is for people to order takeaway more, rather than less, frequently.
Certainly, Brexit is likely to impact on the company’s financial performance. However, this could be in a positive way, since Just Eat could be boosted by weak sterling providing a positive translation adjustment. And while UK consumer spending could fall in 2017, takeaways are viewed as an affordable luxury by most consumers which they’re unlikely to forego.
A better option?
Just Eat’s growth outlook and valuation hold greater appeal than sector peer Domino’s Pizza (LSE: DOM). It’s expected to record a rise in its bottom line of 14% this year, followed by growth of 11% next year. This puts it on a PEG ratio of 1.8 which, while attractive, is much higher than Just Eat’s valuation.
However, Domino’s has a more consistent business model. It’s not seeking to expand at the rapid rate of its rival, with it having a long track record of double-digit growth. This reduces its risk profile versus Just Eat, while Domino’s also has the potential to expand into new product lines over the medium term. It already serves products other than pizza, such as chicken, while its investment in digital innovation means that customer loyalty remains relatively high.
As such, while Just Eat is a sound buy after today’s share price fall, Domino’s seems to be the more enticing option for the long term based on its risk/reward ratio.
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Peter Stephens owns shares of Domino's Pizza. The Motley Fool UK has recommended Domino's Pizza and Just Eat. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.