Zacks Investment Ideas feature highlights: Grubhub and Huron Consulting

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Sep 05, 2014, 09:30 ET

CHICAGO, Sept. 5, 2014 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Grubhub (NYSE:GRUB-Free Report) and Huron Consulting (Nasdaq:HURN-Free Report).

Don't Take a Pass on These Deals

A lot of investors see a secondary and they tend to steer clear. The stock will see some rather large sellers getting out or there could be serious dilution, which should hurt estimates.

After a secondary prices, it generally sees some weakness, but in some cases that presents an excellent entry point for savvy investors.

Home Delivery

Grubhub (NYSE:GRUB-Free Report) has only been trading for a few months, but it has caught the attention of growth investors with some impressive numbers. The company recently announced a secondary offering of stock and that caused a decline of nearly 10% in the price of the stock. The deal just priced and closed at $40.25, with the company selling

Who Sold?

It is also helpful to go through the filing to see who is selling and how much in a secondary offering. For GRUB, we have Spectrum Equity and Warburg Pincus Private Equity each selling 1.92M shares with an additional 329K shares being offered if the underwriters' option is exercised in full. Lightspeed Venture Partners is also a seller of size with 1.194M shares in the deal and a little more than 200K additional shares in the option.

So venture backers are liquidating some shares here, and those are some big positions being sold, but the important idea that is often lost in these deals is that even if the full amounts are sold, all of these venture backs are still in the stock. In fact, Spectrum will still hold 5.3M shares of 6.7% of the outstanding stock and Warburg Pincus will hold 3.8M shares. Lightspeed will hold just under 1.4M if they sell all available shares.

It is also important to look at the management team and what they are selling into the offering. The CEO holds 2.15M shares before the offering, is selling 183K shares and will still hold 2.4% of the total shares if the full amount is sold. You cannot fault management for selling into the offering, but you would be worried if they sold a significant chunk of stock. Selling more than 15% of total holdings would be a red flag, but that is not the case with GRUB.

The company sold 1.25M shares in the offering with 8.7M shares being offered by stakeholders and management.

Big Growth

In the prospectus we get a lot of information about the company. Analysts will tend to use this information to build a model of the income statement and from that they will make projections on future earnings. I wanted to highlight the revenue growth and one of its key drivers.

It pretty much goes without saying that there is some good growth here. Investors really want to see strong growth from a young company and GRUB is delivering just that. But will the growth continue?

To answer that question, one has to look at the stat provided in the prospectus called "Active Diners." The company defines Active Diners as the number of unique diner accounts from which an order has been placed in the past twelve months through their platform. This is basically the number of people that use the service, and that number is growing in a big way.

Another telling stat is the gross food sales. This is just the total dollar amount of all orders from restaurants on their platform. It includes taxes, tops and delivery fees. The company recognizes revenues that are commissions from these transactions. We see a small decline in the most recent quarter, and as the company matures, we will probably see a seasonal influence on this metric.

So the secondary offering here has pulled the price of the stock down, but if the company keeps posting higher revenues with more users, this could be a great opportunity for investors. GRUB is currently a Zacks Rank #2 (Buy) and the company is presenting at the Barrington Research Fall Conference today.

A Different Deal

Just last night, Huron Consulting (Nasdaq:HURN-Free Report) announced a $225M convertible offering. This isn't like the secondary deal that is described above, but it still presents an opportunity for investors.

HURN is a consulting firm out of Chicago that is on my radar screen due to its stellar valuation. The stock is up almost $2 today following the news of this offering, but it is still very attractive to investors looking for value.

Convertible Offering

Just what is a convertible offering? Well this sort of deal is basically a debt offering that can convert into stock down the road. Most times you will see investors buying this debt with every intention of it becoming stock down the road, so it offers a bit more premium than a regular fixed income deal.

Why would a consulting firm do a convertible deal for $225M that could expand to as much as $250M? Well the first thing that comes to mind is a large transaction could be in the works. That could boost revenue numbers and give the firm more potential earnings. The problem with big deals like that is they have to be accretive rather quickly to make sense. The company could also be looking at several small transactions as well.

William Blair put out a note today on the deal and noted that there was a positive tone to recent meetings with management and the maintain their "Outperform" rating on the stock. At this point, the analyst is holding his earnings estimates firm at $3.40 for 2014 and $3.69 for 2015.

The Value In HURN

I like this stock more for its valuation that the potential for expansion via a convertible offering.

HURN trades at about 18x forward earnings, which is below the 21x industry average. Its price to book multiple of 2.4x is also showing the company trades at a discount to the 4x industry average for the same metric. Even the price to sales multiple of 1.6x is well below the 2.7x industry average. Basically any metric I pull up will show that HURN is trading at a discount to its peer group.

Analysts are projecting revenue growth of 8% for 2015 for HURN, and that is above the 6.5% industry average, so despite its already strong growth profile, we can expect almost any acquisition to increase that gap.

Huron Consulting Group is a Zacks Rank #2 (Buy) and along with its great valuation, it could be making some acquisitions in the near future.

Conclusion

Just because a stock is doing a secondary or even a convertible offering, don't just pass them over. Take a look inside the prospectus and see who is selling. Sometime a big deal that raises cash can signal excellent future potential.

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