The Motley Fool

Order, order! I would avoid shares in this company

The idea was simple: an online platform to order takeaway food. Investors who bought into Just Eat (LSE: JE) have had a crazy month, with shares dropping by 11%, to an eventual gain to date of almost 14%. On Tuesday of this week, shares climbed by 24%. So what has happened?

First orders

Following the news of a proposed merger with Dutch-based company earlier in the year, Just Eat has found itself in the middle of a bidding war, as a hostile bid from investment company Prosus came in. The bid was valued at £4.9bn and was swiftly rejected in favour of the £8.3bn merger with

For shareholders, the tie-up with would be irresistible. Just Eat has said that being in partnership with “provides Just Eat shareholders with greater value creation than the terms of the Prosus offer”.

Just Eat believes that Prosus has undervalued the company with its 710p cash offer. However, Prosus stated that there will be a need for substantial investment in the food delivery firm.

It’s a point my colleague Harvey Jones has noted, when pulling apart Just Eat’s accounts.

That’s because Just Eat’s half-yearly results were announced in July, and although the numbers look good at first, with revenue growing by 30% to almost £465m, there was some bad news.

Too much to stomach

Reported in the numbers was a drop in profits. This in itself would not concern me, but when you consider that the drop is 98%, it leaves a bad taste in the mouth.

Just Eat brushed this aside, stating the drop was due to “planned investments in delivery and iFood”.

Alongside this disappointment, earnings per share was down by 36%, along with a reduction in net cash generated by operations of 15%. Added to the pain, in its Q3 figures, sales growth had slowed to 8%, down 11% from the proceeding period.

With a price-to-earnings ratio hovering around the 40 mark and no prospective dividend, I find the Just Eat shares unpalatable.

The business finds itself in an incredibly competitive market, with rivals like UberEats and Deliveroo fighting over the same customers. The fact that Prosus has made an offer, highlighting the need for a chunky investment, presumably in addition to the cash set aside by Just Eat, rings alarm bells.

The online food delivery business is a big market, which I’m sure will get much bigger over the next few years. But I like to see a long history in a company before I part with cash, and this market is too new for me. Although Just Eat is one of the dominant players in the field, it’s work will by no means be easy over the next few years.

For me, if I owned shares in Just Eat I would cash out while the going is good.

A Growth Gem

Research into unloved sectors can often unearth fantastic growth opportunities to help boost your wealth – and one of Fool UK’s contributors believes they’ve identified one such winner, which could be a bona-fide bargain at recent levels!

To find out the name of this company, and to get the full research report absolutely free of charge, click here now.

T Sligo has no position in any of the shares mentioned. The Motley Fool UK has recommended Uber Technologies. 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. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.