After Russian miner Evraz and Polymetal, Ocado shares are the FTSE 100's worst performers in 2022. After another lurch lower today, our head of markets talks us through its first-quarter update as well as events in the US overnight.
The absence of any further shocks enabled the relief rally to continue for the time being, with the interest rate hike from the Federal Reserve coming in exactly as expected.
That being said, the pathway for the remainder of the year seems to be that a further six rate increases could be seen. These will become increasingly necessary in the ongoing battle to rein in inflation, with comments from the Fed reassuringly noting that the US economy is currently strong enough to absorb such increases without derailing its recovery. The rally improved the fortunes of the major indices in the US, although each remain in negative territory for the year to date, with losses of 6.3% for the Dow, 8.6% for the S&P500 and 14.1% for the Nasdaq.
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Elsewhere, hopes for progress in talks between Russian and Ukraine and a statement from China suggesting that monetary stimulus would be available to boost an economy currently under pressure from the latest pandemic outbreak, were supportive for sentiment.
Strong showings in the US and Asia overnight failed to exert a major influence the UK’s premier index, which had previously enjoyed a strong day in advance of any central bank guidance, with the FTSE100 opening modestly higher. Nonetheless, the index continues its outperformance relative to many of its global counterparts, now standing down by just 0.7% in the year to date and clearly continuing to attract interest from investors seeking a somewhat defensive home for their capital.
Ocado not delivering enough
The retail arm of the Ocado Group (LSE:OCDO) has updated investors on progress during the first quarter, where shopping patterns are continuing to revert to pre-pandemic levels. There is an added complication in terms of comparatives, which for the moment are running hot although these should ease as the year progresses.
The numbers are therefore somewhat mixed, with revenues down by 5.7% (but up by 31.7% if compared to 2020), and with the number of active customers having increased by 31% to 835,000. However, the average basket size dropped by 15%, offsetting the fact that there was an increase of 11.6% in customer orders.
The retail business continues to ramp up fulfilment capacity, but in the meantime is facing the headwinds which are being seen across many sectors. Labour shortages, price increases in raw materials, energy, utilities and even dry ice compound inflationary effects at a time when the cost of living is reaching alarming levels for many.
Nonetheless, the group is focused on mitigating these issues by cost reduction and some passing on of the higher prices to consumers, noting that demand remains robust.
Even so, it is the Solutions part of the business which is of particular interest to investors, since this is the unit where the majority of investment, not to mention potential returns, is seen. Although not covered in this update, more broadly the group has had some positive news of late. Since the disappointment of the management guidance offered in February, Ocado has since won a patent legal case, bolstered operations in France and announced a new venture in Poland. Only a continued foray into new markets seem likely to stem a share price decline which has seen a drop of 45% over the last year, as compared to a gain of 7.8% for the wider FTSE100.
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The danger of Ocado becoming a perennial “jam tomorrow” stock is reflected in that underperformance, while the ongoing lack of a dividend payment offers little solace to investors.
Meanwhile, the negative reaction to a statement which only covers the retail arm is further proof a growing lack of support from investors for the group as a whole. The prospects for the group, and for the Solutions business in particular, are well understood but have yet to convert into a continually profitable business. As such, the jury remains out with the market consensus of the shares still stuck at a "hold", albeit a strong one.
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