Tesco’s [TSCO] share price has remained stagnant this year, even as the coronavirus drives a shift to online shopping. That’s in stark contrast to Ocado’s [OCDO] share price, which has seen bumper growth thanks to investors betting on its global technology business.
Now the two grocers are tussling it out for the title of the UK’s most valuable retailer. On 30 September, Ocado's market cap came in at £21.7bn — enough to push Tesco's £21.1bn into second place, despite having a fraction of its market share. Such competition is bound to affect Tesco’s share price.
Will Tesco’s share price move following its upcoming earnings, or is Ocado the real growth stock?
When does Tesco release earnings?
How Tesco’s and Ocado’s share prices stack up
Tesco's share price has failed to achieve steady growth since Dave Lewis took charge as CEO in 2014. That's despite Lewis's tenure seeing a steady increase in both earnings and revenue.
The unprecedented events of 2020 have seen even more volatility from Tesco’s share price this year, with a 15.9p (or 7.04%) drop taking place between the 22 September and 2 October.
Ocado's share price, however, has increased 147.73% since mid-March as investors bet on the stock as a technology play thanks to its business providing advanced grocery delivery technology overseas. Tesco acknowledged this arm of Ocado’s business by removing it from its custom-compiled index of rival companies.
“Ocado has experienced significant share price growth, which analysis shows is directly correlated to the sales of its technology platform as opposed to its food business,” Tesco said.
“Ocado has experienced significant share price growth, which analysis shows is directly correlated to the sales of its technology platform as opposed to its food business” - statement from Tesco
What should investors watch out for?
In the first quarter, Tesco's online sales shot up 48.5% compared to the same period last year. Of course, that was driven by lockdown as more people shopped online. In the second quarter, analysts will be looking to see whether or not the trend has continued at the same pace.
Some clues could come from Ocado's most recent quarterly results, which saw retail revenue grow 52% — a boom Ocado credited to the 'shift to online grocery’ in the UK continuing.
Tesco's YoY rise of online sales in Q1
Tesco has said that online sales now account for 16% of its business, up from 9% before the pandemic. The supermarket created 16,000 new jobs last month in its online grocery division.
This surge in online sales hasn’t translated to Tesco’s share price, however, as the costs of PPE equipment, home deliveries and more staff weigh on profits. If the UK retailer can balance booming sales with increased costs this time round, Tesco’s share price could move upwards.
Change at the top
Dave Lewis stepped down as Tesco’s CEO last week after 6 years in the top spot. In that time, Lewis has turned Tesco around following an accounting scandal that cost the supermarket millions. This strategy included reducing Tesco’s international presence to focus on core markets, most notably with the sale of its Asian businesses. Investors will be hoping that the promised £5bn special dividend resulting from the sale will still be paid out.
Where Lewis's successor Ken Murphy next takes Tesco will be closely watched. One area to monitor is whether Murphy decides to maintain the supermarket’s presence in central Europe, which includes stores in the Czech Republic and Hungary.
Murphy will also have to address Tesco Bank. Tesco Bank is expected to post an operating loss of between £175m and £200m this year due to provisions for potential bad debts. That’s a substantial dent to Tesco’s bottom-line and something that could worsen if more money is set aside in the upcoming results.
What next for Tesco’s share price?
Stricter lockdown measures in the UK could continue to boost online sales for both Tesco and Ocado, at least in the view of CMC chief market analyst Michael Hewson:
“If you take the view we’re heading into another lockdown and pubs and restaurants are in the firing line then supermarkets are likely to benefit from that in terms of higher weekly shops as people go out less.”
“If you take the view we’re heading into another lockdown and pubs and restaurants are in the firing line then supermarkets are likely to benefit from that in terms of higher weekly shops as people go out less” - CMC chief market analyst Michael Hewson
Tesco said it expects operating profit this year to be at a 'similar level to 2019/2020’. Whether it can overtake Ocado as the most valuable grocer by market cap is a different story.
Tesco's share price has an average 278p price target from the analysts tracking the stock on the Financial Times. Hitting this would see a 30.8% upside on Tesco’s share price through 5 October’s close. Ocado has an average 2,300p price target, which would see a 13.79% downside.
|PE ratio (TTM)||21.25|
|Operating Margin (TTM)||4.48%|
Tesco share price vitals, Yahoo Finance, 6 October 2020