Final update GrubHub delivers big time

Investment Analysis Clubs Saul’s Investing Discussions
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About a year ago on 4/27/17, I posted here an update of my 5/19/15 original post about GrubHub Inc. (GRUB).
http://discussion.fool.com/grubhub-grub-revisited-32691575.aspx

Since then, over the recent past 52 weeks, GRUB has substantially outperformed not only the S&P 500, but also highly regarded favorites discussed and held by investors here - ANET, SHOP and ALGN - as shown at the following Big Chart website:
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?..

Since GrubHub Inc. (GRUB) is not a Saul-held stock, my final update provides closure here for this growth-oriented consumer discretionary company that has strong financial fundamentals and performance without any moat and continues to maintain its position as leader of the pack in a highly competitive arena.

CORPORATE FINANCIALS

The following table shows the following major changes to date since the financials given in my 4/27/17 and 5/15/15 posts:
• Since April 2017, Market Cap has substantially increased to $9.53 billion from $3.69 billion.
• GRUB stock price has substantially increased 162% from $42.92 on 4/27/17 to a 52-week high of $112.41.


GRUB                    3/13/2018       4/27/2017       5/15/2015

Market Cap               $ 9.53 B        $ 3.69 B        $ 3.35 B
Employees	            2,125           1,518     

52-wk high	           112.41           44.58           47.95
Price	                   109.25           42.92           39.91  
52-wk low	            32.43           21.41           29.99

EV/EBITDA (mrq)	            68.02           22.90
P/E (ttm)	            97.54           74.00          110.86
Fwd P/E	                    48.77           32.03           50.00
P/B (mrq)	             6.48            3.78            4.12
P/S (ttm)	            13.95            7.48           11.81

KEY BUSINESS METRICS

To analyze the company’s business performance, determine financial forecasts and help develop long-term strategic plans, GRUB management reviews the following key business metrics:

 
                                       Daily                 Gross
FY	   Active Diners  Change   Average Grubs  Change   Food Sales   Change
	        (a)	   Y-o-Y        (b)	   Y-o-Y      (c)        Y-o-Y

2017	      14,462,000   76.9%      334,000      21.5%   $ 3,784 B     26.2%		
2016	       8,174,000   21.2%      274,800      21.0%   $ 2.998 B     27.3%
2015	       6,746,000   34.1%      227,100      24.2%   $ 2.354 B     31.7%
2014	       5,029,000   47.0%      182,800      69.4%   $ 1.787 B     76.0%
2013(d)        3,421,000  246.9%      107,900      74.0%   $ 1.015 B     78.3%
2012	         986,000   43.1%       62,000      35.7%   $ 0.569 B     38.1%
2011	         689,000	       45,700	           $ 0.412 B

(a) Active Diners are the number of unique diner accounts from which an order has been placed in the past twelve months through the Company’s platform. active Diners from the GrubHub Platform are included from the merger Date.
(b) Daily Average Grubs are the number of revenue generating orders placed on the platform divided by the number of days for a given period.
(c) Gross Food Sales are the total value of food, beverages, taxes, prepaid gratuities, and any delivery fees processed through the Company’s platform. all revenue generating orders placed on the platform are included, but only the commissions from the transaction are recognized as revenues, which are a percentage of the total Gross Food Sales for such transaction.
(d) includes results for Seamless through the merger Date, and of GrubHub Holdings inc., for the remainder of the period.

The data in the above table show huge growth in all 3 business metrics for FY 2017 that provide the basis and reasons for GRUB’s aggressive growth plan.
• Substantial 77% y-o-y increase to over 14.4 million Active Diners (from 8.1 million in 2016).
• Strong 21.5% y-o-y increase to 334,000 Daily Average Grubs (from 274,800 in 2016).
• Strong 26.2% y-o-y increase to over $3.7 billion Gross Food Sales (from $3 billion in 2016)

Regarding revenue, net income and diluted EPS, what more can I say, as this board favors strong growth percentages as shown below. GrubHub went public on April 4, 2014.


	REVENUE  Change  NET INCOME     Change     EPS        Change
FY	  ($ M)	   YoY	   ($ M)         YoY      Diluted      YoY

2017    683.067   38.5%      98.983      99.7%     1.12        93.1%
2016	493.331	  36.3%	     49.557      30.1%	   0.58	       31.8%
2015	361.825	  42.5%	     38.077      56.9%	   0.44	       46.7%
2014	253.873	  85.1%	     24.263     259.6%	   0.30       150.0%
2013	137.143	  66.6%	      6.747     -14.8%	   0.12       -36.8%
2012	 82.299	  35.8%	      7.919     -47.9%	   0.19       -47.2%
2011	 60.611		     15.211		   0.36

Grubhub financial guidance expects a FY 2018 revenue range of $910 M - $960 M, a Y-o-Y change increase of 33% to 40%.


**MARGINS**	

GROSS:
2017	52.3%
2016	56.6%
2015	61.3%
2014	65.5%
2013	63.9%
2012	65.6%

OPERATING:
2017	13.1%
2016	17.0%
2015	17.1%
2014	17.7%
2013	10.9%
2012	10.8%

PROFIT:
2017    14.5%	
2016	10.1%
2015	10.5%
2014	 9.6%
2013	 4.9%
2012	 9.6%

ROIC

Return of Invested Capital (ROIC) has increased significantly.


FY        ROIC
2017    11.78%
2016     8.16%
2015     7.43%
2014     5.23%
2013     2.38%

As of 3/13/2018, GRUB is creating 6.9 cents of pure economic value for every dollar invested.


ROIC     13.42%  
WACC     6.46% 
EVA         6.96%

CAPITAL STRUCTURE

GRUB has maintained a rock solid capital structure as shown in the following table.


CAPITAL STRUCTURE         3/13/2018           4/27/2017           5/15/2015	

Cash (mrq)	          234.090 M           323.62  M         $ 298.22 M
Working Capital	          185.935 M           285.847 M
Total Debt (mrq)	  173.551 M             0                   0
Total Equity (mrq)	1,117.816 M           972.119 M
Total Capitalization	1,291.367 M         1,082.609 M
LT Debt/Equity (mrq)	   15.2%                0.0%                0.0%
Debt/Capitalization	   13.4%                0.0%                0.0%
Current ratio (mrq)	    2.06                3.59                2.57

GRUB has excellent increasing FCF.


2017      $ 87.3 M
2016      $ 60.5 M
2015      $ 33.5 M
2014      $ 65.8 M
2013      $ 33.8 M

Stock-based compensation to revenue ratios are substantially below the generally accepted 10% upper limit.


	Stock-Based
FY	Compensation     SBC/revenue

2017     $ 32.748 M        4.8%
2016	 $ 23.559 M        4.8%
2015	 $ 13.405 M        3.7%
2014	 $  9.393 M        3.7%
2013	 $  4.933 M        3.6%
2012	 $  2.364 M        2.9%

WHY THE GRUB STOCK PRICE SPIKED UPWARD IN FEBRUARY 2018

The Big Chart website at the beginning of this post showed a substantial spike increase in February 2018 for GRUB. In its 2/8/2018 press release announcing strong financial results for 4Q 2017 and FY 2017, GRUB also revealed financial guidance, expecting a FY 2018 revenue range of $910 M - $960 M, a Y-o-Y change increase of 33% to 40%.

On the same day in another news release, Yum! Brands and GrubHub announced a new U.S. Growth Partnership.
https://investors.grubhub.com/investors/press-releases/press…

Yum! Brands (YUM), one of the world’s largest restaurant companies, and GrubHub (GRUB), the nation’s leading online and mobile takeout food-ordering company, today announced a new partnership to drive incremental sales to KFC and Taco Bell restaurants in the U.S. through online ordering for pickup and delivery. YUM also entered into an agreement with GrubHub to purchase $200 million of common stock, subject to customary closing conditions, an investment that will provide GrubHub with additional liquidity to accelerate expansion of its industry-leading U.S. delivery network, drive more orders to YUM restaurants, and further enhance the ordering and delivery experience for diners, restaurants and drivers.

The unique partnership aligns with YUM’s long-term strategies to make its iconic brands easier for consumers to access and drive profitable incremental sales growth for franchisees. GrubHub will be YUM’s only national partner providing dedicated support for KFC and Taco Bell branded online delivery channels, along with access to GrubHub’s online ordering platform, logistics and last-mile support for delivery orders, and point-of-sale integration to streamline operations. KFC, Taco Bell and GrubHub will engage in joint marketing initiatives that will generate new diners and drive order frequency for existing diners.

Subsequently, on 2/13/18, GrubHub announced its expansion of the partnership with Foursquare to bring Restaurant delivery to more users nationwide.

Grubhub (GRUB), the nation’s leading online and mobile food-ordering company, today announced an expansion of its partnership with Foursquare, a technology company that uses location intelligence to build meaningful consumer experiences and business solutions. Foursquare City Guide users across the country now have the ability to order from over 57,000 local GrubHub restaurants that have listings on Foursquare’s online and mobile platforms. While browsing Foursquare City Guide, users can click the “order now” button to be directed to GrubHub’s online or mobile platforms to quickly and easily place an order.

Data Partnership Results and Methodology: ?With this expanded partnership that now encompasses more than 57,000 restaurants across the country, Foursquare and GrubHub combined their data to help diners uncover locally loved dishes and explore the best restaurants. GrubHub data reveals the most ordered dishes across major U.S. cities, and Foursquare highlights some of the best restaurants known for these trending foods based on taste data from its apps, Foursquare City Guide and Foursquare Swarm.

The above two recent news releases are examples of GrubHub’s aggressive management, firing all cylinders on a growth-oriented course and striving to keep the company ahead of the pack. In doing so, thus far, GRUB has strong financial fundamentals, positive value creation and strong performance that all offset its high P/E. Nobody knows how long GrubHub can continue to grow and sustain its business model and operations. The competition in this arena remains very fierce and demands investor vigilance.

As always, conduct your own due diligence and decision-making.

Regards,
Ray

38 Likes
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Ray,

A few questions:

  1. Is this one you are invested in? Your post is very dispassionate, which is fine…but I would be interested in your conclusions. I haven’t delved deep into the company, but to me the numbers seem terrifying.

  2. Any insight into why the Active Users grew so fast in 2017? Seems like that came out of nowhere after tepid growth in 2015 and 2016. Do they make any effort to project that for 2018? 77% really is a startling number…almost hard to believe.

  3. It’s nice to see the operating margin going up, but do you think there’s any way they can sustain that, given that gross margin is going in the opposite direction? If so, how?

  4. What are your thoughts about competition? How have they been doing so well in such an environment, and what is their biggest threat?

Bear

5 Likes
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Ray,
Thank you for this deep dive on GRUB. If I wasn’t so sold on ANET, TTD, NTNX or had more cash or something to sell I would lean towards GRUB.

What holds me back today is the valuation. 4/2017 would’ve been a great time to buy though.

Do you think YUM will pressure margins lower? or is Grub strong enough to keep >50 gross margins?

NTNX and TTD are trading under a P/S of 9 with rev growth >+46%

Just not enough money to go to all these high growth companies.

but I like the research and sharing.

Just another motley opinion,

Robert

3 Likes
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Wish you would stick around, imuafool,

I’m in at 10% and have no plans to eat elsewhere for awhile. Let’s talk and get rich. :slight_smile:

Dan

1 Like
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Bear: Is this one you are invested in?
-----------------------------------------=

Apparently, either you did not open my referenced 4/27/2017 post (which actually was a response to your comment in another thread back then, Bear: “I have never even heard of GrubHub”), or you did open my 4/27/2017 post and perhaps missed my statement:
“Although this aggressive, growth-oriented company kept on course firing all cylinders, the stock price slowly trended downward. I took a position in GRUB when the stock price dropped below $30/share. After a l-o-o-ong slow upward climb, today the GRUB stock price spiked upward 22.56% with a $7.90 price increase.”

After my 4/27/17 post, I accumulated more GRUB shares after the company announced Q2 and Q3 financial results in 2017.

Bear: I haven’t delved deep into the company, but to me the numbers seem terrifying.

Your “terrifying” comment is mind boggling.

With very little effort, you can quickly peruse earnings call transcripts available at the Seeking Alpha website and the latest FY 2017 Annual Report and latest quarterly reports and quickly find answers to almost all your questions. Only you can find and assess those “terrifying” numbers whatever these are in your mindset.

I reiterate the ending of my OP, “As always, conduct your own due diligence and decision-making.”

Bear: What are your thoughts about competition? How have they been doing so well in such an environment, and what is their biggest threat?

Again, referring to my 4/27/2017 post and thread, I addressed competition in the following response that you can read here:
http://discussion.fool.com/j214-in-one-business-i-am-familiar-wi…
In my 5/19/15 post I addressed competition, acquisition and consolidation in this arena that continue today. One mentioned competitor - Yelp’s Eat24 - was acquired by Grubhub in 2017.
http://discussion.fool.com/any-appetite-for-some-grub-31758671.a…

According to the FY 2017 Annual Report, Competition, page 8:
http://d18rn0p25nwr6d.cloudfront.net/CIK-0001594109/90e4c2fb…
The Company primarily competes with the traditional offline ordering process used by the vast majority of restaurants and diners involving paper menus that restaurants distribute to diners, as well as advertising that restaurants place in local publications to attract diners. For diners, Grubhub competes with the traditional ordering process by aggregating restaurant and menu information in one place online so that it is easier and more convenient to find a desirable restaurant option and place a customized order without having to interact directly with the restaurants. For restaurants, the Company offers a more targeted marketing opportunity than the yellow pages, billboards or other local advertising mediums since diners typically access the Company’s platform when they are looking to place a takeout order, and Grubhub captures the transaction right when a diner has made a decision.
The Company’s online competition consists primarily of national and local service providers, point-of-sale module vendors that serve some independent restaurants who have their own standalone websites and the online interfaces of chain restaurants that also offer takeout. Compared to other online platforms, Grubhub offers diners a wide range of choices, with over 80,000 restaurants on the Company’s platform, including low cost or no cost delivery, menu price parity with any other online ordering option and full price transparency with no hidden fees. the Company also competes for diners with online competitors on the basis of convenience, control and customer care. For restaurants, Grubhub competes with other online platforms based on its ability to generate additional orders, manage challenges such as customization, change orders, menu updates and specials and the ability to help them improve their operational efficiency, with product innovations like Grubhub for Restaurants and POS integration, as well as providing a seamless diner experience.
Management believes the Company competes favorably based on these factors and its singular focus on connecting restaurants and diners for takeout ordering. although paper menus are still the Company’s biggest competition, based on available information regarding the number of diners and restaurants on the platform and the number of orders processed through the platform, management believes Grubhub is the largest online provider of takeout orders in the United States for independent and chain restaurants.

To maintain its position as leader of the pack , GrubHub has taken aggressive actions, making strategic acquisitions and partnerships that, in turn, address and answer the following question.

Bear: Any insight into why the Active Users grew so fast in 2017? Seems like that came out of nowhere after tepid growth in 2015 and 2016. Do they make any effort to project that for 2018? 77% really is a startling number…almost hard to believe.

Insight and facts again are easily and readily available on earnings call transcripts at the Seeking Alpha website and in the FY 2017 Annual Report and latest quarterly reports.

On the 2/8/2018 GRUB Q4 2017 Results - Earnings Call, Grubhub CFO Adam DeWitt reported the following:
https://seekingalpha.com/article/4144770-grubhub-grub-q4-201…

“Our active diners grew 77% year-over-year to 14.5 million during the fourth quarter. The outsized growth in this metric is largely the result of a little more than 4 million diners we added as a result of the Eat24 transaction. Important context for the more than 4 million diners we acquired with Eat24, this group includes diners from the Eat24 branded platform, as well as a substantial number of diners from restaurant white label sites run by Eat24 and a substantial and growing number of diners ordering on the Yelp transaction platform.”

The CFO also addressed guidance for Q1 2018 and FY 2018.

According to the FY 2017 Annual Report, Key Business Metrics, comparing 2017 to 2016, page 29:
http://d18rn0p25nwr6d.cloudfront.net/CIK-0001594109/90e4c2fb…

The Company experienced significant growth across all of its key business metrics, Active Diners, Daily Average Grubs and Gross Food Sales, during the year ended December 31, 2017 as compared to the same periods in the prior year. Growth in all metrics was primarily attributable to increased product and brand awareness by diners largely as a result of marketing efforts and word-of-mouth referrals, better restaurant choices for diners in our markets, technology and product improvements. The increase in our key business metrics, particularly Active Diners, was also impacted by the inclusion of results from recent acquisitions. [my emphasis in bold]

Here are the major acquisitions and partnerships made by Grubhub in 2017:

• 6/8/2017 Acquisition of Foodler
https://investors.grubhub.com/investors/press-releases/press…
Grubhub, the nation’s leading takeout marketplace, announced that it has entered into an agreement for an all-cash transaction to acquire Foodler, one of the largest independent North American online food-ordering companies.

The agreement with Boston-based Foodler, which is subject to certain closing conditions, extends Grubhub’s leadership in New England and will add more than $80 million of annualized gross food sales in 2017. This will expand the breadth and depth of Grubhub’s national network of more than 55,000 existing restaurant partners and 8.8 million active diners.

• 8/3/2017 Acquisition of Yelp’s Eat24 and Grubhub - Yelp Long Term Partnership
https://investors.grubhub.com/investors/press-releases/press…

Grubhub Inc. (NYSE: GRUB), the nation’s leading online and mobile food ordering company, and Yelp Inc. (NYSE: YELP), the leader in connecting people with great local businesses, today announced a long-term partnership designed to capitalize on each company’s unique assets and propel online takeout and delivery. As part of the agreement, Grubhub will acquire Yelp’s Eat24 business and Yelp will integrate online ordering from all Grubhub restaurants onto its extensive local goods and services platform.

Matt Maloney, Grubhub’s founder and chief executive officer stated: “Adding Eat24’s large diner base and thousands of restaurants to our platform will accelerate Grubhub’s mission to become the most comprehensive marketplace connecting takeout diners and restaurants. The long-term agreement ensures that Grubhub also has access to Yelp’s enormous user base and clear content leadership to help drive more diners to our restaurants.”

This acquisition was completed on 10/10/2017

• 12/13/2017 Grubhub expanded partnership with The Cheesecake Factory to deliver menu favorites from coast to coast.
https://investors.grubhub.com/investors/press-releases/press…

Grubhub, the nation’s leading online and mobile food-ordering company, today announced an expansion of its partnership with The Cheesecake Factory®, America’s favorite restaurant known for its extensive menu, generous portions and legendary desserts. Grubhub is now offering delivery for The Cheesecake Factory in 18 different states across the country (Alabama, Arizona, California, Connecticut, Florida, Kentucky, Michigan, Nebraska, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, and Wisconsin).

For more in-depth info, here again are financial facts about 2017 acquisitions, according to the FY 2017 Annual Report:
On October 10, 2017, the Company acquired all of the issued and outstanding equity interests of eat24, llC (“eat24”), a wholly owned subsidiary of Yelp inc., for approximately $281.8 million, including $281.4 million in net cash paid and $0.3 million of other non-cash consideration. Of such amount, $28.8 million will be held in escrow for an 18-month period after closing to secure the Company’s indemnification rights under the purchase agreement. eat24 provides online and mobile food ordering for restaurants and diners across the United States. The acquisition expanded the breadth and depth of the Company’s national network of restaurant partners and active diners.
The Company granted RSU awards to acquired eat24 employees in replacement of their unvested equity awards as of the closing date.
On August 23, 2017, the Company acquired substantially all of the assets and certain expressly specified liabilities of a&D network Solutions, inc. and Dashed, inc. (collectively, “Foodler”). the purchase price for Foodler was $51.2 million in cash, net of a net working capital adjustment receivable of $0.7 million and cash acquired of $0.1 million. Foodler is an independent online food-ordering company with an established diner base in the northeast United States. The acquisition expanded the breadth and depth of the Company’s restaurant network, active diners and delivery network.
The results of operations of eat24 and Foodler have been included in the Company’s financial statements since October 10, 2017 and august 23, 2017, respectively, but did not have a material impact on the Company’s consolidated results of operations for the year ended December 31, 2017.
The excess of the consideration transferred in the acquisitions over the net amounts assigned to the fair value of the assets was recorded as goodwill, which represents the value of increasing the breadth and depth of the Company’s network of restaurants and diners. The total goodwill related to the acquisitions of eat24 and Foodler of $153.4 million is expected to be deductible for income tax purposes.
The assets acquired and liabilities assumed of eat24 and Foodler were recorded at their estimated fair values as of the closing dates of October 10, 2017 and august 23, 2 017, respectively. the following table summarizes the preliminary purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the eat24 and Foodler acquisitions.
————————————-

New partnerships in 2018 were addressed in my OP.

==========================
Regarding decreasing gross margin questions from Bear and Robert/OIFAirborne11C,
Grubhub CFO DeWitt commented on the 2/8/18 earnings call for Q4 2017 and FY 2017:

Operations and support expenses grew 58% year-over-year from $51.7 million to $81.7 million in the quarter driven by increased driver pay to support our delivery efforts, the underlying growth of our total order volume and the inclusion of Eat24.

For clarification, the operating and support expenses included from the Eat24 orders are lower on a per order basis than GrubHub orders because there are no delivery expenses. As CEO Matt Maloney noted, the growth and efficiency of our delivery services in 2017 was impressive. While quickly expanding our coverage from 0 to over $1 billion in annualized gross food sales, we also achieved our goal of exiting the year at similar economics on orders that restaurants deliver for themselves and orders that GrubHub delivers on their behalf. This is important because it allows us to offer the best restaurants to every diner while maximizing profitability.
Also CEO Maloney had opened with the following statement:
Throughout 2018, we’ll be expanding the reach of every one of our current 80 delivery markets and we will launch over 100 new delivery markets. Given the time it takes to ramp volume in these expansion areas and the up-front investment and driver capacity required, this expansion will have a small impact on our 2018 profitability. We know how to maintain economic parity between our GrubHub delivery and self-delivery orders and we expect to achieve this in these new markets once we scale. This partnership with Yum! will benefit both sides of our network, all of our diners, and all of our restaurants by bringing more volume, more liquidity and more loyalty. Investing now will maximize the impacts of the partnership and Adam will discuss how this affects our guidance.

Given all the recent acquisitions, partnerships and ongoing operational integration and adjustments, I look forward to the upcoming Q1 2018 financial results that also will reveal whether or not gross margins continue its downward trend and profit margins trend upward.

I’m going to stop now as this post has become longer than my OP.

Again, as always, conduct your own due diligence and decision-making.

Regards,
Ray

8 Likes
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Insight and facts again are easily and readily available on earnings call transcripts at the Seeking Alpha website and in the FY 2017 Annual Report and latest quarterly reports.

Ray,

Now that you point out that their fantastic growth last year is due to acquisitions, it makes perfect sense to me why gross margin has come down. Whether or not it stabilizes, they’re certainly due for less growth in 2018 and beyond (barring…you guessed it…more acquisitions).

The CFO said: We ended the year just slightly above our original expectation of mid to high 20%s organic growth, but we’ve set the table for healthy future order growth as a result.

Their share price is up 200% since the beginning of 2017 and he says they are “just slightly above” their original expectation for growth…it’s like even he thinks GRUB shares are overpriced.

Now, when we have SHOP growing organically at over 70%, several other companies over 50%, and most companies we discuss on this board growing over 40%, are you really excited about GRUB’s 20% organic growth? Even without considering the competition and whatever is happening to gross margin, this is a company that isn’t really growing very fast organically and yet still trades at a premium PS ratio (in GRUB’s case, 14!) and a premium PE ratio (of 92!) – terrifying indeed.

I submit that this might be the perfect time for you to take your profit. I think the market is mis-pricing GRUB to your advantage.

Bear

1 Like