After Recommending GrubHub For Over A Year, Morgan Stanley Takes Neutral Stance

Morgan Stanley has been recommending investors be buyers of GrubHub Inc (NYSE:GRUB) since Jan. 1, 2017. Now may be the time to move to the sidelines after a 175-percent return, the firm said Wednesday.

The Analyst

Morgan Stanley's Brian Nowak downgraded GrubHub from Overweight to Equal-weight with an unchanged $100 price target.

The Thesis

GrubHub's stock is "fully valued" at $100 per share, as it represents a 22x multiple on Nowak's 2019 EBITDA, a premium to its historical average, the analyst said. A $100 price target also values the core business at $87 per share; the recent addition of Yum! Brands, Inc. (NYSE:YUM) to its delivery platform adds another $13 per share, Nowak said. 

Investors should look for the following over the next year, the analyst said:

• Updates relating to the integration of Eat24 and benefits from additional restaurant supply.
• The integration of Yum Brands' restaurants.
• A take rate convergence of acquired assets to the GrubHub average.
• Management's ability to lift its organic take rate through sponsored listings.
• Signs of ongoing momentum in Tier 2 and Tier 3 cities.
• Core gross food sales and organic growth rates.

Nowak named the following as downside risks:

• A deceleration of core growth.
• The scale-up of delivery goes more slowly and expensively than anticipated. 
• The economics of the Yum Brands deal fail to result in a material earnings lift.
• Competition from rivals like Uber's food delivery business.

Price Action

Shares of GrubHub were trading lower 3.42 percent at the time of publication Wednesday.

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Photo courtesy of GrubHub.