Ocado (LON:OCDO) sales continued to grow ahead of the grocery market average in Q3, though the differential isn't the main watch for investors.
Ocado meets Alexa
Even the web grocery pioneer nods at the elephant in the room in its update. The group notes it's the first to offer customers the facility to modify orders using Alexa, Amazon (NASDAQ:AMZN)'s talkative A.I. front-end. Nice to have and a neat way to mediate neutral concern about Amazon's incremental encroachment into Ocado's fresh produce patch. Ocado has seen “no real impact” from Amazon’s expansion in the UK’s grocery market, its CFO said on Tuesday morning. For now, that’s plausible. The e-commerce behemoth has rolled out Amazon Fresh very slowly and over a narrow range of north, central and east London boroughs. No one believes it will stop there though. So the question of how well Ocado is defended is one which management still needs to answer adequately.
Rating and reality
True, Ocado’s sales growth shows signs of stabilising. Total retail sales were up 13.1% to £312.7m over 13 weeks to late-August, faster than the 12.5% rise over the first half. Order size continued to moderate as per long-term norm relative to the group’s promotional phase, but the effect is being neutralized by rising average orders per week, up 16% in Q3, from 15.6% in H1. At this rate, and factoring current obligations, compound average earnings are widely forecast to slightly outpace Tesco’s c. 20%. Not bad, if a still-eye watering forward rating of around 275 times is ignored. Tesco (LON:TSCO) can be bought for 19 times next year’s earnings, a modest premium to the sector. And Ocado is clearly not Amazon, though the Internet giant’s valuation slightly lags its UK rival.
The divide
This is where investors continue to divide on Ocado, opting either for faith or scepticism on its ability to come good on long-standing plans, or to unearth an overlooked means of traction. The group’s economical disclosure around the long-awaited technology deal sealed in June only lifts confidence to a limited extent, particularly as it was software-only. To be sure, there’s no way around the investment needed to ensure optimum capacity. The group’s third and largest fulfilment centre, around 100km west of the capital will cost the equivalent of 2% of 2018 Ebitda. That looks absorbable. But with an operating margin that’s erratic and often below the market, it’s easy to see why ‘execution risk’ is the first thing many Ocado investors thought on Tuesday. Absent another big technology reveal, this time of the kind investors were initially guided to expect, at best, Ocado shares should hold the erratic 260p-340p range since June into year end, but no better. Investors want more plausible long-term defences.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.