By Victor Reklaitis, MarketWatch
Just Eat and Delivery Hero have served tasty fare to both customers and investors, with stock gains of more than 20% over the past six months.
The two online-food-ordering stocks also received institutional approval recently: a spot in the U.K.’s FTSE 100 benchmark /zigman2/quotes/210598409/delayed UK:UKX -0.84% for Just Eat and inclusion in the Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP -0.41% for Delivery Hero /zigman2/quotes/202519651/delayed DE:DHER +1.81% . Buying the two stocks at current levels, however, might be more akin to dining at an overpriced restaurant than finding a deal on a value menu.
Just Eat trades at 48 times estimated forward-year earnings, while there is no comparable price/earnings ratio for Delivery Hero, as it isn’t expected to turn profitable until 2019, according to FactSet data. When it comes to another metric—price to estimated forward-year sales—the two fast-growing companies are both around 8. That’s above GrubHub’s /zigman2/quotes/210404212/composite GRUB +1.27% multiple of about 7, but below the 10 sported by European peer Takeaway.com /zigman2/quotes/201653805/delayed NL:TKWY 0.00% .
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Just Eat’s shares are “fairly valued, particularly after the strong performance and risks related to own-delivery investments,” say RBC analysts in a recent note. They’re referring to the possibility the company will start a big push to deliver meals itself, rather than simply matching customers with restaurants that deliver and then charging a commission. Pressure from U.K. competitors Uber Eats and Deliveroo may help bring about such an effort.
But that type of do-it-yourself move didn’t treat GrubHub investors so well in 2015, point out RBC’s Sherri Malek, Richard Chamberlain, and Wassachon Udomsilpa. “The margins went down significantly, and it caused the stock to de-rate significantly for a year,” Udomsilpa tells Barron’s, though she adds that GrubHub’s shares eventually recovered.
The RBC team has a Sector Perform rating on Just Eat and a 12-month price target of 840 pence ($11.40), implying a slight rise from Friday’s close of 811 pence. Morgan Stanley analysts led by Andrea Ferraz are even more tentative, putting a price target of 760 pence on the shares, along with an Equal Weight rating. They say they’re waiting for new CEO Peter Plumb to expound on his strategy. Just Eat gets roughly two-thirds of its revenue from the U.K., with France and Australia providing about 9% apiece.
When it comes to Delivery Hero, RBC’s analysts warn about a “potentially more costly battle for market share.” In Germany, which provides about 20% of revenue, the company is seen as the leader, but it’s battling with Takeaway.com. The industry’s markets tend to end in a winner-take-all scenario, and the outcome in Europe’s biggest economy is uncertain, RBC says. Delivery Hero gets about 39% of its revenue from Europe, 25% from the Middle East and North Africa, and 27% from Asia. The RBC team has a Sector Perform rating on Delivery Hero and a price target of 38 euros ($46). That’s around where shares were a month ago before slumping on news of a new-share issuance. The stock made its debut in June and closed on Friday at €31.98.
UBS analysts also worry about competition and Delivery Hero’s moves to exit markets where it isn’t leading. A UBS team led by Chris Grundberg has a Neutral rating and a price target of €39 on the stock.
The consensus on the two stocks is largely bullish, and RBC’s analysts praise the underlying businesses. Even so, a bargain-seeking investor may want to pass. The companies could need to digest their recent gains.