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Bull of the Day: Grubhub (GRUB)

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Grubhub (GRUB - Free Report) , the nation's leading online and mobile food ordering company dedicated to connecting hungry diners with local takeout restaurants, delivered the coveted "earnings trifecta" last week in their Q2 report on July 28.

The earnings trifecta is what we here at Zacks call top and bottom line beats, plus raised guidance. Grubhub reported Q2 EPS of $0.23 versus the $0.19 expected. Revenue also came in higher at $120 million versus expectations of $114 million. Improved engagement with customers and restaurants drove these higher operating metrics, more than offsetting seasonal weakness.

In addition, the company issued a raise in their fiscal year 2016 revenue guidance to $480-88 million versus $469 million expected. This guide is on the back of strong growth with active dinners up 24% year-over-year to 7.35 million.

How Does GRUB Make Money?

The company’s online and mobile ordering platforms allow diners to search for and order directly from more than 44,000 takeout restaurants in over 1,000 U.S. cities and London. Every order tracked by Grubhub and is supported by the company’s 24/7 customer service teams. Grubhub has offices in Chicago, New York and London.

Grubhub makes money on a combination of advertising from restaurants, commission or "take-rate" agreements on food sales, and deliveries.

Gross Food Sales were $733 million, a 29% year-over-year increase from $568 million in the second quarter of 2015. Daily Average Grubs were 271,100, a 23% year-over-year increase from 220,100 Daily Average Grubs in the second quarter of 2015.

Grubhub receives a "take-rate" of roughly 15.7% of food orders, comprising a base rate of 10% and a placement premium of 0-20%, depending on market density and positioning preferences. Take-rates are increased when restaurants call GrubHub and ask how to get more orders.

Strong Q2 results were fueled by a reacceleration of sequential net active diner adds (+26% organic, +70% including LA Bite) and a 70bps improvement in the take rate due to increased usage of the delivery network.

Credit card fees represent about 2% of gross-food sales, or 14% of total revenue.

The Shorts Got Their Lunch Eaten

My colleague Jeremy Mullin, who focuses on stocks worth selling short, recently wrote about GRUB in his article 4 Internet Stocks Crushing Earnings...

GrubHub has a market cap of $3.25 Billion and a Forward PE of 56. The company sports a Zacks Style Score of “A” in Momentum, but “F” in Value. Because of this high valuation the stock has been a favorite with short sellers, with 40% of the float holding short. The company’s valuation is something investors have questioned in the past, but a recent earnings beat might force the shorts to cover.

The stock surged over 20% higher after the numbers. All-time highs are another 23% higher and if the momentum continue shorts will have to cover, taking the stock to April 2015 levels.

And what made GRUB a Zacks #1 Rank this week was the fundamental reaction from analysts. In the past few days, six of seven covering analysts raised their EPS estimates to push the 2016 consensus 15% higher from $0.59 to $0.69. For 2017, revisions have also gone up 15% from $0.76 to $0.89.

Growth Opportunity Ahead

Grubhub may be a valuation challenge for some investors, but they are also the leading platform and brand in a big addressable market. Analysts at Northland Capital Markets believe that the percentage of online/mobile takeout orders is due to increase from 3% to 50% over time and that Grubhub stands to significantly benefit from this behavior shift. The analysts noted...

"Also, the company has penetrated less than 5% of the sizable ($67 billion or one-third of the total $200 billion) U.S. takeout market. On a restaurant basis, it is in just 10% of the 350,000 independent restaurants."

Wedbush analysts were also impressed by the growth opportunity and raised their price target on GRUB shares from $40 to $47, which represents a 20x multiple on their FY17 adjusted EBITDA estimate. As the company grows into this valuation, it looks like one to accumulate in the mid-$30s.

Just keep an eye on the Zacks Rank for any notable changes in GRUB's earnings trends.

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