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As Ocado posts a half-year profit, could the business now go from strength to strength?

July 2, 2014



YES Jonathan Jackson Ocado offers a unique way to play the expected strong growth in the UK online grocery market. The group offers investors the potential to benefit from its industry-leading intellectual property, built up over 13 years of investment in technology, to more efficiently manage the online shopping and delivery experience. During the latest trading period, Ocado increased its share of the online grocery market and achieved ongoing improvement in operating metrics - like customer numbers, order accuracy and on-time delivery. Over the medium term, we believe it'll show strong earnings growth, driven by double-digit revenue growth, increased operating leverage through making better use of its fixed cost base, and improved cost efficiency. Consensus earnings are too low and don't take into account the significant uplift in margins from improved efficiency as revenues grow. We remain buyers of this unique investment opportunity.


Jonathan Jackson is a partner and head of equities at Killik & Co.


NO Clive Black Ocado delivers a strong service to its customers, garnering tremendous loyalty.


But there's a big difference between being a good online distributor for Waitrose and a facilitator for Morrison, and being a good investment. Approaching 13 years of business, Ocado is barely profitable. The reason is that the last mile is very costly, and while it's picked technology that Flash Gordon would be proud of, it's over-capitalised. Ocado wanted to be a proprietary grocer but failed - hence the morphing into a management consultancy and online logistics provider for supermarkets. With such high ratings, one would think it would be shooting the lights out trading-wise. However, management speaks of performing in-line with the UK online market - so no different to Asda and Sainsbury's, and behind Waitrose. We see risk from falling grocery prices and the potential for Waitrose to walk away. On a price-earnings ratio of 90, we remain to be convinced by Ocado and still urge investors to realise gains. Clive Black is head of research at Shore Capital.


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Source: City A.M. (UK)


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