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'Favorite Trump Trade' GrubHub Eyes Bigger Pie; Can It Deliver?

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In a world where convenience is key and time is valuable, GrubHub ( GRUB ) has made a name for itself in food delivery.

"I-want-it-now" millennials are pushing more services online, and GrubHub boasts not only the largest online food ordering platform in the U.S., but also considerable name recognition and a first-mover advantage.

The Chicago-based firm also is expected to be one of the biggest beneficiaries of the highly anticipated corporate tax reform set to be enacted by President Donald Trump, as it conducts nearly all its business in the U.S. GrubHub is currently swallowing a tax rate of approximately 40%.

Credit Suisse analyst Paul Bieber calls GrubHub a "favorite Trump trade," saying in a Jan. 10 note that a lower rate would "significantly increase GrubHub's (earnings) potential." He estimates a 5% reduction would drive 10 cents to 12 cents of incremental earnings per share on an annual basis. Bieber has an outperform rating and 48 price target on GrubHub.

Meanwhile, Morgan Stanley's Brian Nowak upgraded the company to overweight on Jan. 13 with a 44 target price. He echoes that GrubHub "is among the biggest potential beneficiaries (of tax cuts) in our coverage universe."

32% Earnings Gain

GrubHub will issue its fourth-quarter results on Feb. 8. Earnings are projected to rise 32% to 25 cents while revenue increases 37% to $137.3 million. After coming off a low of 35.90 Jan. 10, GrubHub stock rose that day and in 10 out of the last 12 trading days. Shares were down nearly 2% Monday in the wake of Trump's immigration ban fracas, but recovered and were down only fractionally at the close.

[ibdchart symbol="GRUB" type="daily" size="threequarter" position="leftchart" ]The stock has gained roughly 20% from its 34.66 low on Nov. 11 amid the prospect of a lower tax burden, and is now about 6% below a 44.68 buy point from a consolidation base. The stock's Relative Strength Rating of 92 puts it among the best stocks when it comes to recent price performance.

Looking at the big picture, GrubHub is a turnaround stock. By January 2016, shares had fallen 63% from their April 2015 all-time high. But the stock has since recouped nearly all of those losses, earning it a spot on the IBD 50 list of leading growth stocks.

Over the past 18 months, the company has been investing in key markets to deepen its penetration, as well as expanding to new markets where it "can see rapid growth," Chief Executive Matt Maloney said on the company's third-quarter conference call Oct. 26.

And looking ahead, "the majority of our spend and our investments will be in driving efficiency and increasing the network and availability of our drivers in the markets we are already in," he said.

7.7 Million Diners

Along with Seamless, which was acquired in 2013 to drive scale, GrubHub now boasts some 7.7 million active diners in over 1,000 cities ordering from more than 45,000 local restaurants.

That list of restaurants keeps growing by leaps and bounds, and accelerates as time passes. In 2015, it added 1,750, while in the first half of 2016 alone it's estimated to have added 2,000 more. Morgan Stanley's Nowak projects that 2,205 were added in the second half of last year.

What's unclear is how many outlets GrubHub added after landing a couple of big fish last year. It inked deals with Subway and P.F. Chang's, among other pacts, during the third quarter. Subway has nearly 45,000 restaurants worldwide with nearly 27,000 of those in the United States, while P.F. Chang's has more than 200 restaurants domestically, but it's unclear how many of those outlets GrubHub will be serving.

Still, that kind of expansion is helping GrubHub address one of the key reasons for customer churn on its platform. Nowak says his most recent AlphaWise survey data found that 44% of participants named "limited restaurant selection" their No. 1 reason for not following through with a transaction on a food delivery platform. That beats out other reasons, like slow delivery, poor food condition and expense.

Along with a wider selection, GrubHub has made other improvements to its platform to increase conversion rates, meaning turning an app user to a purchaser. Maloney says that GrubHub is leveraging the data that flows through its platform to personalize its site.

"Releasing these features has generated substantially more data on our diner's preferences as well as insight on what drives diner engagement and conversion higher," Maloney said on the call.

IBD'S TAKE:GrubHub is still a ways from hitting a buy point, but has gained huge strides in recent weeks, up 10 out of the last 12 sessions. The stock is tops in IBD's Internet-Content group and holds a 98 Composite Rating out of a possible 99.

GrubHub also launched a full rebrand earlier in 2016, and says that improved marketing has helped contribute to its active diner growth, which hit 19% in the third quarter.

"Active diner growth (a sign of GRUB's ability to bring on new users) and gross food sales (GFS) per active diner (measuring GRUB's ability to grow share of stomach) remain the two most important metrics in evaluating the health of GRUB's business," Nowak said, adding that he sees "bullish indicators in both of these, which are likely to lead to higher earnings power and upward revisions."

Long List Of Rivals

While GrubHub claims the largest market share among online food delivery platforms - excluding Domino's ( DPZ ) - the competition is heating up. Not only do you have names like DoorDash, Postmates, Foodler and OrderUp, but Yelp ( YELP ) has Eat24, Square ( SQ ) has Caviar, Amazon ( AMZN ) has Prime Now for restaurants and Uber has UberEats.

All vary on their delivery minimums, delivery fees and tip protocols. GrubHub typically has a $10 minimum and $2.99 fee, plus tip, and some restaurants offer GrubHub ordering with self-pickup.

But for the delivery option, if you factor in your opportunity cost - that is, the time you save by not having to drive somewhere to get the food, wait to pick it up yourself, then drive back home - the benefit could outweigh the premium paid.

It seems America agrees: Credit Suisse's Bieber has compiled data that point to some $245 billion in chain and independent restaurant takeout revenue in 2013, and that number has certainly grown since.

Bieber calculates GrubHub's penetration of the independent takeout market hit 4% at the end of 2016. As an underpenetrated market opportunity remains, Maloney said on the conference call the company is definitely in the early innings.

"There's a lot of work to do, both in aggregating data and presenting the data and then capturing the output of those actions," Maloney said. "But ... I think that it is going to be hugely valuable for restaurants and then our business in line."


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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