ii view: Ocado still confident as new customers stick with it

This FTSE 100 stock was a winner in 2020, but has proved to be this year’s biggest loser so far. We assess prospects. 

Ocado Retail – Fourth-quarter update to 28 November 2021

• Retail revenue down 3.9% compared to Q4 2020 to £547.8 million
• Average orders per week up 8.5% to 375,100
• Active customers up 22% to 832,000

Retail division chairman Tim Steiner said:

"We are very encouraged by the underlying trends which are driving growth in our business. Hundreds of thousands of UK consumers have tried online grocery over the last eighteen months and the vast majority are continuing to shop online and are not going back to physical stores. 

“At a time of growing momentum in the channel shift from physical stores to online we are bringing significantly more capacity to market and are confident that we are on a strong, long-term growth trajectory".

ii round-up:

Ocado (LSE:OCDO) operates via the two divisions of Retail and Solutions. 

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). It delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a growing non-food selection. 

Solutions is responsible for helping other retailers with their online offerings using its Ocado Smart Platform (OSP) software and robot technology. Current retail partners include Morrison’s in the UK, Kroger in the US and Coles in Australia. 

For a round-up of this latest retail divisional trading update, please click here.

ii view:

Analysts broadly break the Ocado business and its prospects into three areas. First, its UK Retail business; second the valuation of contracts around its Solutions business; and thirdly, expectations on newly won Solutions contracts. Ocado shares have been the biggest faller within the FTSE 100 index year-to-date, down 28%, having been the biggest company riser - apart from fund Scottish Mortgage (LSE:SMT) - over the pandemic hit 2020, gaining by almost 79%.  

For investors, expectations of a slowdown in sales for its UK retail business, as UK pandemic restrictions eased over 2021, appear to have fed into its year-to-date underperformance. The broader FTSE 100 index is up by over 12% so far during 2021. A fire at one of its premises and the subsequent operational disruption also offered challenges, as have broader labour shortages and cost price pressures. 

But Ocado once estimated its addressable market for its Solutions business to be around $700 billion, and a US court ruling in Ocado’s favour over patent claims from Norwegian robotics company AutoStore also eases uncertainty. However, pandemic impeded international travel is unlikely to be oiling the wheels of Solution business deals - around 80% of Ocado’s stock market value is considered by analysts to be attempting to value its Solutions business, the other 20% the UK Retail business. For now, and while difficulty beating tough year-on-year comparatives is evident, an estimated analyst fair value price of £21.43 arguably implies potential for long-term upside. 

Positives: 

• Efficient technology-based packing of customer orders
• UK capacity continuing to grow

Negatives:

• AutoStore to appeal against US court decision
• Doesn’t pay a dividend

The average rating of stock market analysts:

Hold