Just Eat shares climb 25% on merger announcement. Here’s what I’d do

As Just Eat plc (LON: JE) announces a big merger, is it a good time to buy shares in the takeaway delivery business?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Just Eat (LSE: JE) revealed on Saturday it was in talks concerning a possible merger with Takeaway.com of the Netherlands, saying: “A further announcement will be made if and when appropriate.

That further announcement didn’t take long, as the takeaway food delivery company told us Monday of “an agreement in principle on the key terms of a possible all-share combination of Just Eat and Takeaway.com.”

The agreement would see existing Just Eat shareholders owning 52.2% of the new combined company, which looks set to be valued at around £10bn, with a combined £6.6bn in orders in 2018. Headquarters would be in Amsterdam, but a London listing would be retained.

Just Eat shares gained a quick 25% in early trading, reaching 797p, their highest valuation of 2019 so far. 

What to do?

The question now is, do you want to be a part of the booming takeaway food business and buy in? I’m cautious, because I reckon it might not be as good as it looks. Just Eat shares reached a peak of 906p in February 2018, some way ahead of Monday’s spike. But since then they had shed 30% of that value by market close on Friday.

Some of the decline will have been due to competition fears following Uber‘s failed attempt to buy out UK rival Deliveroo in late 2018. That has since been intensified by a major investment by Amazon in Deliveroo, apparently after a couple of failed attempts to buy it outright.

Romance over?

I suspect there’s also an element of investors getting a bit bored with the latest new growth idea, as so often happens, and I think we may well be heading for a period of more modest valuations for food delivery companies. Just Eat shares, for example, have been on very high P/E valuations, which reached 75 by the end of 2015.

A trebling of the share price over the past five years does seem to have justified the early optimism, providing a very nice reward for investors despite more recent weakness. And forecasts suggest Just Eat’s P/E would have dropped to around 35 by the end of 2020.

That would still have been quite a heady growth rating, and it would have needed a 2.5-fold multiplication in earnings per share to bring it down close to the FTSE 100‘s long-term average of around 14. Seeing how the takeaway food delivery business has grown so strongly over the past few years, I don’t discount that possibility — though I do see significant risk.

Snap them up?

What would I do now? Last week, before the latest news broke, I would have gone along with my colleague Roland Head’s take on it. A time when a growing business sector has seen share prices peak and then fall back, and is experiencing increasing competition and softening margins isn’t, in my view, the time to start investing in that business.

On today’s elevated price I see the risk of disappointment. High-flying (high-risk) growth shares aren’t for me at the best of times. If I held Just Eat shares, I’d be selling them now and pocketing my 25% bonus.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »