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Will Ocado’s share price accelerate alongside new growth plans?

Ocado has stepped up growth plans for the end of 2019, with new warehouses and partners expected to accelerate the retailer’s expansion. So, is now the time to buy Ocado’s share price?

Ocado [OCDO.L] has stepped up its growth plans in the lead up to Christmas 2019, announcing that it will build a new ‘mini’ warehouse in Bristol, on top of signing a major contract with Japanese retailer Aeon to help develop a network of automated warehouses for the Asian market.

Alongside the boost provided by these recent announcements, Ocado has seen its share price rise more than 55% from the start of the year to 6 December ­– despite a warehouse fire in February which wiped more than £1bn off market cap.

55%

The rise of Ocado's share price from start of 2019

  

Does the supermarket’s growth potential make Ocado’s share price a buy?

 

How the stock market has reacted

On 28 November, the British supermarket announced that it will build a sixth warehouse in the UK, a ‘mini’ customer fulfilment centre in Bristol with the capacity to work through 30,000 orders per week. The site, which is being built in an existing warehouse, is expected to be completed by the end of 2020 or early 2021.

News of the new site sent shares up by near 5.6% between 28 and 29 November.

 

 

 

Ocado’s share price then continued to climb with the news, revealed on 29 November, that it is to set up robotic warehouses for online grocery sales with Japanese retailer Aeon. Ultimately the move suggests that the online supermarket may be able to expand its reach into Asia.

 

A show of confidence?

To fund these projects, Ocado said that it is to issue £500m in bonds. The move demonstrates that the company is confident its recent deals and investments will provide returns. The bonds will carry a coupon between 0.75% and 1.25%, according to the Financial Times, and can convert into Ocado shares at a price expected to be 45% above the current share price.

However, Ocado’s share price closed 7.4% lower by the end of 2 December, when the announcement was made.

Investors are still concerned with Ocado’s path to profitability, which remains uncertain. As it stands, the company is looking at another two years before it sees any profits. The business has only recorded an annual profit twice in its 19-year lifetime, and has not produced a profit since its IPO in 2010.

Part of the share price decline may also be down to the company’s increasing spend, which is forecast to arrive at £350m for the current financial year and is likely to grow as the company fits out more warehouses.

Bernstein analyst Bruno Monteyne suggested to the FT earlier this week that the cost of each fulfilment centre is around £40m. The retailer has contracts to build 38 of these facilities by the end of 2025.

 

Market cap£8.667bn
Return on Equity (TTM)-35.28%
EPS (TTM)-24.70
Quarterly Revenue Growth (YoY)10.90%

Ocado share price vitals, Yahoo Finance, 10 December 2019

 

What analysts say

As of 28 November, Ocado holds six buy ratings, six hold ratings, five underperform ratings and two sell ratings, according to FT figures. Nearly 10% of Ocado’s shares are on loan to short-sellers, according to the publisher.

Thus, a large part of Ocado’s woes are down to the current state of the company’s bottom line. However, as The Motley Fool’s Alan Oscroft writes, “with the potential growth of the global food distribution market, I think Ocado shares are looking increasingly like a long-term buy.”

“With the potential growth of the global food distribution market, I think Ocado shares are looking increasingly like a long-term buy” - The Motley Fool’s Alan Oscroft

For the 12 weeks to 3 November Ocado was the fastest-growing supermarket with sales up 13.5%, according to the latest data from market research firm Kantar. Ocado has outpaced all of the UK’s ‘big four’ grocers and German discounters Aldi and Lidl, according to the firm.

FT data shows that the company has witnessed an average revenue growth of 13.97% since 2015. However, earnings per share have declined by 24.72% in the same period.

Meanwhile, JPMorgan Cazenove has stated that Ocado’s £9bn valuation is “stretched”, with around £4bn of it coming from joint ventures and overseas ventures. This means the market’s valuation is “ascribed to potential new signings”, over real returns. The bank suggests that there may be cheaper points of entry into the stock, when the current overvaluation corrects itself.

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