Elliot Turner of RGA Investment Advisors presented his in-depth investment thesis on Grubhub (US: GRUB) at Wide-Moat Investing Summit 2019.
Elliot calls one of his favorite setups “the post-hype sleeper” after the fantasy baseball term for a player who joined the league with considerable hype only to take longer to develop than the average fan expected. Markets are pretty similar in how early hype gets extrapolated too far, and when reality settles in, investors must grapple with whether the setback in valuation is temporary or permanent. Such stocks get stuck in-between a growth and value investor base and are thus perfect for scouting out GARP opportunities.
For the second time in less than four years, Grubhub has set up accordingly as a result of a business model evolution from a pure two-sided marketplace connecting diners with restaurants to a three-sided marketplace adding in the delivery component. For the first time in over two years the stock is trading at a market cap to Gross Food Sales below one. With the nationwide rollout of turnkey delivery, investors are questioning the long-term margin profile of the business; however, Elliot believes margins are the wrong focal point. Delivery is inherently lower margin as a result of higher take rates. EBITDA/Gross Food Sales is more appropriate and has been pretty consistent around the 4.5% level, though with the nationwide rollout of turnkey it will be lower in 2019. For delivery marketplaces, network effects matter most on the local and/or regional level and Grubhub dominates the most delivery-friendly markets in the US. Grubhub boasts a large and growing addressable market, with low penetration, a smart management team proven adept in execution and disciplined in M&A, and a reasonable valuation that supports a DCF valuation into the mid-$80s per share.
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About the instructor:
Elliot Turner is a co-founder and managing director at RGA Investment Advisors, LLC. RGA Investment Advisors runs a long-term, low turnover, growth at a reasonable price investment strategy seeking out global opportunities. Elliot focuses on discovering and analyzing long-term, high quality investment opportunities and strategic portfolio management. Prior to joining RGA, Elliot managed portfolios at at AustinWeston Asset Management LLC, Chimera Securities and T3 Capital. Elliot holds the Chartered Financial Analyst (CFA) designation as well as a Juris Doctor from Brooklyn Law School.. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.