Order up Some GrubHub?

02/16/2015 8:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This featured stock idea is the hands-down leader in online and mobile food ordering; this is a big, mass-market story with huge potential, asserts growth stock expert Mike Cintolo, editor of Cabot Top Ten Trader.

In the words of GrubHub (GRUB), its job is to connect hungry diners with local takeout restaurants, which it does for more than 30,000 restaurants in more than 800 cities.

It sounds like a simple concept—and it is—for consumers, there’s no charge to use the centralized site to look for restaurants and takeout places and pay for your order.

For restaurants, any business through this site is a bonus. And that’s why restaurants have no problem paying GrubHub generous commissions (well north of 10% on every order).

There’s some competition, but GrubHub is buying up some smaller firms (it announced two acquisitions last week), and thanks to the network effect, GrubHub looks destined to stay in front.

In the just-reported fourth quarter, the company had just over five million active diners (up 47% from a year ago), took more than 200,000 orders per day (up 33%), and processed $508 million in food sales (up 37%).

That helped sales and earnings continue their hot streak and management forecast about 35% revenue and cash flow growth in 2015, which is probably conservative.

Of course, the valuation is huge (13 times sales) but we really like the already-solid profit margins (18% pre-tax margins last year).

And, with US takeout being a $32 billion annual business, there’s no reason why GrubHub can’t grow rapidly for many years. Long-term, we think this company can go far.

GRUB isn’t in a decisive uptrend yet, but it’s building a proper-looking base and last week’s huge price and (especially) volume action makes us sit up and take notice. The shares came public last April, rallied to $46 and then pulled back 33% over four months before finding support.

After trading on low volume for a few weeks, the latest rally on out-of-this-world volume tells us big investors were plowing in. GRUB is very volatile, but we’re okay with a small position around here and a loose stop near 35.

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