Why This Analyst Is A Buyer Of GrubHub Into Earnings

In a report published Monday, Brean Capital analyst Tom Forte discussed why the recent pullback in shares of GrubHub Inc (NYSE: GRUB) represents a "buying opportunity" ahead of the company's second quarter print (scheduled for July 28).

According to Forte, investor concern surrounding increased competition in the online restaurant delivery space has created a buying opportunity for GrubHub as there is room for multiple winners in the space, much like there are multiple winners in the online travel sector.

Q2 Expectations

Forte is projecting GrubHub to report revenue of $84.1 million (marking a 40.2 percent annual growth rate), which actually falls short of the consensus estimate of $85.3 million but falls within management's guidance range of $83.5 million to $85.5 million. The analyst is also expecting the company's EBITDA margin to dip 169 basis points to 26.5 percent due to planned investment spending to ramp its first-party delivery efforts.

Forte suggested that investors look out for any commentary on Chicago and New York trends as these markets are key to the company's growth profile. In addition, the company needs to extend its successes to less developed Tier 1 locations (i.e., Los Angeles, Boston) and Tier 2 locations (i.e., Atlanta, San Diego).

The analyst also noted management is expected to offer further commentary on its efforts to integrate its two acquisitions (DiningIn and Restaurants On The Run), including its investment related spending.

Bottom line, Forte suggested that compared to prior quarters, shares may experience "greater short-term volatility" due to "increasing investor skepticism and heightened competition." Nevertheless, shares were maintained with a Buy rating and $50 price target based on the assumption that the company will achieve long-term adjusted EBITDA margins of 38.0 percent.