Just Eat (LSE: JE) is one of London’s most successful tech stories. The group, which was founded ‘in a basement’ in Denmark became a public company in 2014. Since then, growth has exploded with revenues rising from £97m for full-year 2013, to £376m for 2016. City analysts are projecting sales of £507m this year, followed by £617m for 2018. If Just Eat hits these targets, revenue will have expanded sixfold in six years.
As sales have surged, so have profits as the company benefits from economies of scale. For 2013, the firm reported a pre-tax profit of £10.2m. For 2017, analysts have pencilled in a pre-tax profit target of £139m up 1,263% in five years (earnings per share have grown 1,107%) over the same period.
Investors have been (and still are) willing to pay a premium to be part of the growth story. Shares in the group currently trade at a forward P/E of 37.7, which might seem expensive, but compared to projected earnings growth of 38% for 2017, the multiple seems appropriate.
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And I believe shares in Just Eat could have further to run as it continues to expand and consolidates its existing position in key markets.
Slowing growth
Just Eat has attracted some criticism recently as its growth rate has slowed. For the first quarter, the company reported a 25% year-on-year rise in total orders to 39m, although while many managements would kill for this kind of growth, it was the lowest recorded by the takeaway platform since 2014.
Still, it was always going to suffer slowing growth at some point. No company can continue to raise revenue by 50%+ per annum forever, it’s just not possible. Nonetheless, as the firm consolidates its market position, refines its offering to customer and suppliers, and streamlines its operations, profits should continue to improve, albeit at a slower rate of growth than in the past.
A better investment
Even though the company does not offer investors a dividend, in my view, Just Eat is a better buy than struggling former income champion Capita (LSE: CPI).
Shares in Capita currently yield 4.9%, and the company’s management is working hard to ensure that the payout is sustainable by selling off non-core divisions to pay down debt. This is a short sighted strategy. Selling off businesses and under-investing in growth really caps future growth potential.
As Capita rushes to shrink its business to keep its dividend, Just Eat is flush with cash, which management can use to invest in growth. When there are no more opportunities for growth, the company can start to return cash to investors.
The growth outlooks for these two companies differ significantly. Capita’s earnings per share are projected to decline by 8% this year, before rising slightly by 4% next year. This lacklustre earnings growth justifies a low valuation. Shares in Capita currently trade at a forward P/E of 13, which seems about right for the company’s near-term prospects. However, over the next decade, the outlook for the firm is more uncertain.
The bottom line
Overall, Just Eat looks to me to be a better buy than struggling Capita. As the latter shrinks itself to fund the dividend, management is constraining growth. On the other hand, Just Eat still has a long runway for expansion ahead of it.
