Five months ago, investors in online takeout ordering aggregator GrubHub (NYSE:GRUB) got some good news. Northland Securities had just recommended buying their stock, predicting GrubHub shares would hit $40 within 12 months.

But with less than half that projected period having expired -- and GrubHub shares moving down, not up -- Northland is already changing its mind.

Northland points south
Bright and early Wednesday morning, Northland announced it is pulling its outperform rating on GrubHub, and downgrading the stock to market perform. According to the analyst, the main reasons for the rethink relate to "warm weather" that's likely to "impact" Q4 sales. (When it's cold outside, lazy folks will order in. Conversely, fair weather is no friend to takeout). But if you look closely, there may be more to Northland's downgrade than meets the eye.

In announcing its "initiation at outperform" back in July, you see, Northland (and not just Northland) praised GrubHub's "compelling" service offerings, and emphasized how the company has created a market "that was non-existent through the traditional alternative," and had "several" opportunities to grow its business in the months to come.

As those months rolled by, however, the competition has rolled in. Uber launched "UberEats" food delivery in a dozen cities.'s (NASDAQ:AMZN) Prime Now, available in 20 major cities, is also looking to eat GrubHub's lunch. Analysts such as Zack's are warning of competitors swarming into GrubHub's market -- Postmates, DoorDash, Caviar, Munchery, Sprig, Maple, Blue Apron, Plated, and even Yelp (NYSE:YELP), with its YELP Eat24 service.

All this competition has forced GrubHub to up its game and accelerate its rollout to grab as many new markets as possible before the competition arrives -- and Northland worries that as GrubHub expands, its profit margins will contract.

But is Northland right to worry? If you own GrubHub, should you worry about this downgrade?

Let's go to the tape
Well, we've got bad news and good news -- good news first. Whatever the truth about GrubHub per se, I wouldn't worry too awful much about the fact that Northland is turning fickle on the stock. Because the truth of the matter is that Northland ... just isn't that great of an analyst.

You see, here at Motley Fool CAPS, we've been tracking Northland's performance as an analyst for nearly nine years now. And what we've seen over that time is that, generally speaking, when Northland says it's time to zig, you're usually better off zagging ...



Northland Says:

CAPS Says:

Northland's Picks Beating (Lagging) S&P By:




4 points




(59 points)

Unwired Planet



(87 points)

Bad as the record above suggests, Northland's complete record is actually even worse. Across a field of 220 stock recommendations that Northland has announced over the years, fully 60% of these picks have been objectively wrong, failing to outperform the S&P 500. On average, the analyst underperforms the stock market by more than 11 percentage points per pick.

And within the Internet software and services sector, which GrubHub calls home, Northland has racked up an even worse record. Of the analyst's 10 such software picks currently active, 80% are underperforming the market, and by an average of 44 percentage points.

Valuing GrubHub
Now, all of this doesn't necessarily mean that GrubHub is a "buy" -- just that the stock is not an automatic "sell" simply because Northland no longer likes it. Rather, to decide what to do with GrubHub, we need to take a close look at the stock itself. Here's what I see.

Valued at just under $2 billion today, with just under $300 million in cash and no debt worth mentioning, GrubHub boasts trailing earnings of $38 million and about $36 million in trailing free cash flow. That all works to a P/E ratio of about 51, and a trailing enterprise value-to-free cash flow ratio (my preferred metric) of 46. Using S&P Capital IQ estimates to calculate a growth rate, it seems analysts expect GrubHub to grow its profits about 31% annually over the next five years.

That's fast -- but perhaps not quite fast enough to justify a 46 EV/FCF ratio. On the other hand, the top growth rate posited on CapIQ is 48% -- and that estimate, if it proves correct, would imply that GrubHub is a buy.

The rivals
Will GrubHub grow at 48% (or even 31% for that matter)? That depends a lot on how much of a fight Yelp and Amazon, and the other rivals, put up. I see restaurant takeout delivery as a natural extension of both Yelp's and Amazon's businesses, by the way -- this is not simply a business that they're dabbling in, soon to exit (a la Walmart and DVD rentals, for example). And both Yelp and Amazon generate copious free cash flow. Each has the financial wherewithal to compete against GrubHub, potentially stymieing its growth.

In short, this looks like a tough call to make. While I'm not at all impressed with Northland's record in Internet Software and Services to date, this might actually be one of those times when the proverbial stopped clock turns out to be right. My advice? Keep a close eye on GrubHub, because it's still the top dog offering a very useful service. But especially, keep an eye out for better prices -- because this is one stock I'd like a whole lot more if it was a whole lot cheaper.