Should You Take a Bite of This Food Service's Super-Sized IPO?

If an IPO were like a multi-course meal, online restaurant food ordering service GrubHub has opted for an extra course, upsizing its initial public offering of stock to a maximum $178 million from the previously anticipated $100 million. That makes for a very expensive dinner, raising the question of whether it's worth it for investors to pony up for the check.

A big table
One advantage GrubHub has is that it boasts a rather straightforward and easy to understand business model. It facilitates online ordering for customers from independent restaurants in their general area, taking a cut of each order. This is a middleman business that's been around for a long time; the difference with GrubHub is its scale (nationwide as opposed to local) and the technology it brings to the effort (mobile apps and a strong Internet presence).

Another plus is that it's operating in a growing industry. According to figures from the National Restaurant Association, total sales for the sector are projected to reach $683 billion this year. This is a 3.5% increase over the 2013 forecast, and a 16.5% climb from the 2010 figure.

GrubHub is growing too, at least on the top line. From 2011 to 2013 on a consolidated basis (incorporating the results of ex-competitor/current subsidiary Seamless), the company more than doubled its revenues, going from $61 million to $137 million. It's profitable, although costs have eaten into its bottom line of late. 2011 net was in the black at $15.2 million, dropping to $7.9 million the following year and $6.7 million in 2013.

Overstuffed
GrubHub is flooding the market with its stock. All told, after the IPO the firm will have something in the neighborhood of 79 million shares (depending on if and by how much the underwriters exercise their stock allotments). Taking the midpoint ($21) of its flotation price range of $20 to $22 per share gives us a market capitalization of roughly $1.66 billion.

Since GrubHub is unique in its market segment there is no direct publicly traded competitor, but we can match that number against notables in the broader restaurant sector. $1.66 billion eclipses the market cap of 2013 food IPO stars Potbelly with its $536 million, as well as Noodles & Company's $1.2 billion. It even eclipses the occasional established chain operator; Einstein Noah Restaurant Group (NASDAQ: BAGL  ) has a market value of $291 million, and DineEquity (NYSE: DIN  ) clocks in at $1.5 billion.

More shares mean a much skinnier EPS figure, though. Taking GrubHub's most recent full-year net profit of $6.7 million yields a per-share amount of around $0.09. Again using that $21 mid-point price, that gives us an obese price-to-earnings ratio of 246. Einstein Noah's trailing 12-month P/E is a fraction of that, at 20, while DineEquity is close by at 21. Potbelly isn't yet profitable, but even Noodles & Company, a young firm with a hit IPO that fattened its share price, is cheaper on a P/E basis at 172 times trailing earnings.

Taking the comparison further, Chipotle Mexican Grill (NYSE: CMG  ) -- arguably the most beloved dining stock on the market -- currently trades at a 12-month trailing P/E of just under 54. And that's for a company which has grown its net profit by over 50% and its revenues by 40%-plus across the last two fiscal years. Drifting into the fast food end of the market, Wendy's (NASDAQ: WEN  ) is also substantially cheaper than GrubHub, even after coming off its best year (2013) in terms of net profitability in at least half a decade.  Wendy's most recently changed hands at 81 times earnings.

Dine or dash?
Even giving GrubHub the benefit of the doubt and giving it some premium value based on its uniqueness (as a publicly traded entity, anyway) and decent brand recognition, it's an awfully expensive stock. Will that matter on IPO day? If recent history is any indication, possibly not; the aforementioned 2013 IPOs of Potbelly and Noodles & Company both popped in their initial rounds of trading. But first-day pops are often the sugar high that don't last; sooner rather than later, most companies can't escape their valuations. GrubHub's are very high, so perhaps it's best for investors to wait a bit before tucking in to the fresh meal it's offering.

GrubHub is slated to start trading on Friday, April 4. It should be listed on the New York Stock Exchange under the ticker symbol GRUB. 

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