Morgan Stanley Has A Craving For GrubHub Shares, Upgrades To Overweight

Morgan Stanley is building an appetite for GrubHub Inc GRUB shares after three proposed acquisitions of Eat24, Foodler and OrderUp.

These purchases could extend the company’s scale and size edge to four times its nearest competitor, according to Morgan Stanley analyst Brian Nowak.

The proposed acquisitions are generating high incremental EBITDA and are better enabling GrubHub to profitably scale, with the ability to add $80 million to core 2018 EBITDA.

The moves also could expose customers to GrubHub’s platform; survey data shows that around 60 percent of Eat24 users have not used GrubHub in the past six months.

“Exposing these users to GRUB’s ~35K in incremental restaurants should lead to better user conversion and faster Eat24 growth,” said Nowak.

Morgan Stanley has upgraded GrubHub to Overweight from Equal Weight and raised its price target significantly, from $43 to $59.

Analysts believe the industry as a whole has plenty of room for growth, with online food delivery penetration currently only at 6 percent but heading to 10.

GrubHub’s growing scale advantage could compel investors to pay a higher multiple for shares.

While Nowak does not expect competitive pressure from UberEats and Amazon.com, Inc. AMZN to ease up and sees rising marketing spend due to the competition, “Grub’s larger revenue base will enable it to scale faster with ... stronger EBITDA and cash flow,” he said.

GrubHub shares are reaching record high levels following the upgrade. At time of publication, shares of GrubHub were up 5.02 percent at $55.26.

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