2018 was a disappointing and volatile year for shares of the food delivery operator Just Eat (LSE: JE). But this year has brought fresh prospects for the stock which I believe deserves further due diligence.
Global growth
Just Eat, together with its subsidiaries, operates an online digital marketplace for takeaway food delivery. According to its interim results last July, orders via its smartphone app account for 54% of the total.
It serves approximately 25m customers and has over 100,000 local takeaway and restaurant partners in 12 countries, including the UK, Australia, New Zealand, Canada, Denmark, France, Ireland, Norway, Switzerland, Italy, Mexico, and Spain.
The group is a market leader in all these countries and Italy, Spain, and Mexico in particular have shown “strong order growth.” The revenue increase in Canada was a whopping 227%, compared to 30% domestically. Yet half of the revenues and the majority of its operating profits come from its British operations. In other words, global online penetration is still in its infancy.
In July, the company raised its revenue guidance for 2018 to between £740m-£770m and cited a robust performance.
Disruption in food-delivery market
Home-delivered restaurant food in the UK feeds an industry that is fast approaching £4bn and seeing double-digit annual growth. The shifting eating preferences of British consumers towards ease and convenience are fuelling this growth.
As a high-growth company, Just Eat does not pay a dividend. It aims to expand both the customer base and the number of its restaurant partners. The bulk of its partners are low -to-mid-priced independent restaurants and many pubs.
So what major competition does it face? Tech investors that have tasted success in the industry have been backing more recent start-ups like Deliveroo that now has an estimated valuation of over £2bn.
Uber, the ride-hailing giant that is likely to go public in the US during the year, is in potential talks to buy Deliveroo and already operates Uber Eats, a £6bn-a-year food delivery service that is furthering its global expansion in the food-delivery business.
Recent developments at JE
As well as competitive pressures, the company has also had some internal challenges to deal with. At the end of January, its CEO Peter Plumb suddenly resigned. Over the past year, Cat Rock Capital, a Connecticut-based US hedge fund and activist investor with a 2% stake in the company, has been criticising what it has called “unambitious targets and flawed incentive schemes” under Plumb’s leadership.
The activist investor has asked for the sale of the 33% stake in Brazilian market leader iFood, worth some £650m, or about 13% Just Eat’s market capitalisation. Cat Rock wants JE to merge with another food delivery group, a possibility cheered by many analysts and investors. The hedge fund has started a debate that will continue well into 2019 as management further clarifies its focus.
The bottom line
As the food-delivery industry matures, analyst consensus is that eventually there will be fewer companies, yet the growth trajectory for the leaders will be exceptional. Therefore, as a publicly-listed leader, I believe JE could have a place in the portfolio of investors who are looking for high-growth tech companies.
JE’s 52-week price range has been 519p-906p. I’d regard any future weakness in the share price as an opportunity for long-term investors to buy the stock. In four to five years, I expect patients investors to be rewarded.
