After doubling in value in just two years, can online takeaway ordering service Just Eat (LSE: JE) continue to deliver profits for investors?
The company’s management certainly seem to think so. They announced two major acquisitions today which they hope will help them become market leaders in the UK and Canada.
Demanding valuation
UK takeaway customers will probably recognise one of them — hungryhouse — as Just Eat’s biggest rival. The company will pay between £200m and £240m to acquire its competitor. Combining the two firms’ operations is expected to generate “compelling economic benefits of scale”, but this deal doesn’t look cheap to me.
The base purchase price of £200m equates to a multiple of about 15 times hungryhouse’s forecast earnings before interest, tax, depreciation and amortisation (EBITDA) for 2017. That’s a very demanding valuation, especially as it’s based on assumptions about next year’s performance.
Just Eat says that the acquisition is expected to add to the group’s earnings per share during the first full year of ownership. That’s a contrast to the company’s second acquisition today, Canadian firm SkipTheDishes.
This deal will cost £66m and should give Just Eat a significant opportunity to become the market leader in Canada. But SkipTheDishes does not yet seem to be profitable, and is expected to generate sales of just CAD$23.5m (£14.1m) during the current year. This means that the acquisition price represents a multiple of nearly five times sales, for an unprofitable company.
Just Eat’s share price has remained broadly flat after today’s news. That seems fair to me. These deals aren’t without risk, but this company has a track record of converting expensive acquisitions into profitable operations.
The shares currently trade on a 2016 forecast P/E of 53, falling to a P/E of 35 for 2017. I think that’s about right. I suspect we could see further growth in 2017, as Just Eat’s market dominance grows.
Continually beating expectations
Successful growth companies often outperform over much longer periods than anyone expects. One such company is investor darling Domino’s Pizza Group (LSE: DOM).
The pizza takeaway firm is already a common site in UK towns, but management said recently that it’s now targeting a national network of 1,600 stores, up from 1,200 previously.
Given that the current store count is about 950, this changes the outlook for investors. Whereas Domino’s was starting to look like a growth business approaching maturity, the group is now targeting a further 68% expansion in store numbers!
One of Domino’s strengths is that the majority of its stores are franchised. So franchisees fund much of the cost of each new store, in exchange for a share of the profits. This keeps Domino’s costs low and makes it very profitable — the group’s operating margin was 23% last year.
It’s not yet clear to me whether the company’s plan to divide up older franchises into multiple territories and target towns with smaller populations will enable it to maintain this impressive level of profitability.
Earnings per share are expected to rise by 15% in 2016, and by about 13% in 2017. Based on these forecasts, I think the stock’s 2016 forecast P/E of 25 is probably about right. But I wouldn’t bet against more surprises over the next year.