The Motley Fool

Just Eat plc is one stock I’d buy and hold for the next five years

The online takeaway marketplace continues to expand and this offers Just Eat (LSE: JE) a stunning growth opportunity. It has grown in just over a decade to become a business which has served over 14m customers and which now has over 30,000 restaurants on its books. It operates in 13 countries and has scope to expand into new markets. Despite this, it trades on a modest valuation and could even become a strong income play in the long run.

Huge potential

While many consumers are generally becoming increasingly health conscious, the popularity of takeaway food remains high. Whether this is because of preference or convenience, it presents a significant growth opportunity. It has enabled Just Eat to produce earnings growth of between 58% and 200% per annum during the last three years and looking ahead, more double-digit growth looks set to be recorded.

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Of course, the company has been able to successfully capitalise on the popularity of takeaways. It has invested heavily in ease of ordering, which helps to make consumers loyal towards its offering. A mobile app has helped to develop sales yet further, and the company’s ability to innovate could help it to increase customer loyalty over the medium term. Similarly, it has invested in an ordering system for its restaurant partners. This could help to maintain and attract a relatively loyal base of partners over the long run.

Investment outlook

With Just Eat forecast to post earnings in 2018 which are 89% higher than they were in 2016, it remains one of the fastest-growing mid-caps in the UK stock market. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 0.6. This suggests that there could be a significant amount of upside on offer in the long run. That’s especially the case if the company continues to expand internationally and is able to benefit from a potentially weak pound in future years.

In addition to its growth prospects, the company is also set to commence dividend payments next year. While this puts it on a forward dividend yield of just 0.4% at the present time, a payout ratio of less than 10% suggests a rapid rate of dividend growth could be ahead. This could make the stock more appealing to a wider range of investors and increase demand, thereby pushing its share price higher.

Risks

Clearly, an ever-more-health-conscious consumer may eventually seek healthier options than the current takeaway offering of Just Eat. However, this is more likely to be an evolution rather than a revolution, and takeaways themselves may adapt by offering healthier choices. In this scenario, Just Eat would still benefit and could see its profit growth rate unaffected. As such, and with a low valuation, strong business model and income prospects further down the line, now could be the right time to buy it for the long term.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro.