Tuesday 9 July 2019 12:12 pmInteractive Investor Talk

Why Ocado shares have been chased sharply higher

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A costly warehouse fire hasn’t dented enthusiasm for the shares. Our head of markets explains.  

Ocado (LSE:OCDO) transformation from online retailer to cutting-edge technology provider remains clear for all to see.

The Andover fire in February was an unwelcome distraction and has come at a cost both in actual terms as well as in lost sales. The former should be recouped in due course as the result of insurance, and the episode served to underline the resilience of the business as alternative solutions were sought. 

Even so, the £100 million of “exceptionals” in the period dented an already loss-making business, such that the adjusted pre-tax loss widened to £43 million, versus £13 million in the corresponding period last year.

The nature of Ocado’s growth plans carry execution risk as each deal is implemented, while capital expenditure remains high and estimated at £350 million in the immediate future. Meanwhile, from an investment perspective, the lack of a dividend converts the stock into a pure growth story, although, for the most part, this has been a rewarding experience.

Indeed, over the last three years, the shares have risen by over 420 per cent following its success and, equally importantly, in anticipation of the potential riches to come. 

Quite apart from the previously transformational deal with Kroger in the United States, the Marks & Spencer (LSE:MKS) tie-up is one which has both provided an injection of cash for future investment as well as new opportunities in a competitive market. 

The company notes that it now has eight global partners, including latterly Coles of Australia and that it is engaged with “multiple” retailers in driving the business further forward. 

In the meantime, despite the headline loss, group revenues increased by almost 11 per cent in the period, the initial signs for the (one-hour delivery) “Zoom” service are promising and the underlying “Smart Platform” should continue to attract retailers globally looking for an edge using Ocado’s state of the art systems.

Source: TradingView Past performance is not a guide to future performance

This leaves Ocado at an interesting juncture. The bar will be set increasingly high as its partnerships fully come into force, with the hope that the projected revenues are fulfilled. 

The shares have had something of a difficult ride of late, having dipped 17 per cent over the last quarter, although over the last year they remain 15 per cent ahead compared to a 2 per cent dip for the wider FTSE 100 index. 

The potential is clearly positive for Ocado, as evidenced by the initial share price reaction to this statement. However, with the true benefits yet to wash through, and given the meteoric share price performance, the current market consensus comes in at a ‘hold’ as the shares are seen as being up with events – for now.

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