Just Eat Takeaway (LSE: JET) has been a big hit with growth investors during the 2020 Covid pandemic. At one point in October, the share price was up 20% year-to-date. The FTSE 100, at the time, was down 20%. And I think it’s easy to understand the enthusiasm.
During the lockdown, restaurants were all closed, with non-essential stores all shuttered too. And when restrictions were eased, those producing cooked food were only allowed to sell it as takeaway. In those conditions, a delivery service like Just Eat was a lifeline.
But after that October peak, Just Eat shares lost all of their 2020 gains. And, at market close on Tuesday, we were looking at an 8% loss since the start of the year. But then on Wednesday, after a lacklustre morning for the shares, they took off in the afternoon. Just Eat ended with the FTSE 100’s biggest gain, up 7.3% on the day. Do we have a second growth surge on our hands?
Employment practices
The Wednesday afternoon jump came on the back of an announcement about employment practices. With the so-called gig economy coming under increasing pressure, Just Eat is changing the way it treats its couriers. A new approach will shift the firm to a mix of full-time, part-time and zero hours workers.
All of them will get minimum or living wage, pension contributions, holiday and sick pay, and parental leave. The company says it will take on more than 1,000 new people by the end of March, adding to its current 1,500 strong UK workforce.
My flashing warning
This does seem to be an enlightened move, but is the share price hike justified? And would it put Just Eat among my list of FTSE 100 buys now? Well, I certainly wouldn’t buy, and I’ll explain why. I can sum it up with something that flashes across my mind when I examine Just Eat’s financial situation.
It’s not about revenue. No, that’s growing strongly, and I expect it to continue. It’s not about market dominance either. Just Eat has been expanding rapidly, both organically and by acquisition. And it’s not due to any doubts about market potential. I know people will flock back to the pubs when they’re properly open again. But, at the same time, I expect takeaway delivery volumes to continue to grow.
Heady FTSE 100 valuation
The message flashing in my head is: Warning, P/E of 150 ahead!
To give that some perspective, the FTSE 100’s long-term average is closer to 14. Now, sure, growth shares do deserve higher P/E multiples. I’ve bought some at very high valuations before now. And that multiple of 150 is for 2020, and would drop in 2021 — though only to 110. The same ratio at October’s share price peak stood at 180, so the stock’s valuation has already fallen.
I’ve seen UK shares trading on similar high valuations before. But I don’t think I’ve ever seen one whose share price didn’t later crash. My Motley Fool colleague Roland Head sees a possibility of a 40% fall in 2020. I do too. And I fear we’ll have further declines before any long-term sustainable bull run gets going.Â