CREDIT SUISSE: GrubHub's recent acquisition may take time to pay off

Fresh on the heels of the company’s $US287.5 million Eat24 acquisition, Credit Suisse analyst Paul Bieber has downgraded GrubHub, citing “uncertainty on acquisition accretion.”

“We are lowering our rating as we believe shares reflect an optimistic scenario for accretion from recent acquisitions,” he wrote in a note published Monday morning.

In short, Credit Suisse believes any growth from the Eat24 buyout will be slow, and could take a full year to materialise.

Specifically, Credit Suisse points to four reasons GrubHub’s growth from the Eat24 acquisition is likely to take a while:

  • Eat24 integration costs. “We expect the integration of Eat24 to take 6-12 months upon closing the deal and anticipate technology expense synergies to be realised once the integration is complete (ie. late 2018 or 2019),” the bank wrote, noting that integrating Seamless and GrubHub onto a common platform in 2015 and 2016 ran into unexpected delays.
  • Delivery mix shift. Online ordering still only accounts for a small percentage of what Americans spend at restaurants each year. The company’s wide range for EBITDA guidance has Credit Suisse analysts looking at the pace of growth with caution.
  • Potential investment in marketing to drive growth. “Investing in marketing to drive active diner growth in 2nd and 3rd tier cities is a big priority for Grubhub,” writes the bank. “And it’s possible that Grubhub will elect to invest acquisition accretion in marketing to drive faster gross food sales (GFS) growth in 2018.”
  • Management conservatism. The bank expects management to act conservatively in its annual guidance, which could have a chilling effect on the stock price.

The bank’s new price target for GrubHub is $US53 — just a few cents shy of Wall Street consensus, according to Bloomberg, and 6.2% below Monday’s closing price.

Shares of GrubHub are up 52% so far this year. The company declined to immediately comment for this story.

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