Barrington Analyst Thinks GrubHub Can Deliver

GrubHub Inc GRUB, an online food ordering company, has a large and under-penetrated target market along with a deep moat to keep out competition, an analyst said Tuesday.

Barrington's Jeffrey Houston boosted his rating on the company to Outperform, From Market Perform, with a $43 price target.

The company went public in April at $26 a share. A lock-up on the sale of shares by insiders expired during the first week of December and GrubHub closed Tuesday nearly unchanged at $35.87.

The company processes about 200,000 restaurant orders a day from about 4.6 million active customers using 300,000 restaurants.

Diners search and order for free and the restaurants prepare and deliver the food.

GrubHub's gravy comes from the restaurant, only after an order is processed, so tight-fisted restaurateurs put nothing at risk in establishing a relationship.

Amazon.com, Inc.'s AMZN current test marketing of a comparable service in Seattle is "mostly noise" according to Houston, noting GrubHub's "scale advantage" that covers about 75 percent of the U.S. population.

But assuming Amazon makes an announcement about expansion of its service, Houston said GrubHub shares will "come under pressure."

Competitive interest in the market suggests to Houston that GrubHub could become an acquisition target of Amazon, or alternately, privately held Uber, Google Inc GOOGL, Priceline Group Inc PCLN or TripAdvisor Inc TRIP.

One downside: GrubHub expects sales and marketing costs to remain at about 26 percent of revenue for the foreseeable future.

Houston said the primary near-term risks to the business are managerial performance and domestic competition. Longer-term risks include continued market penetration and the unlikelihood of international expansion.