Video

#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Strategic trade
Trade view / 15 March 2016 at 10:22 GMT

#SaxoStrats: Ocado looking tasty

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: OCDO:xlon
Price target:
Market price:
strat
 
Background

Ocado shares are down 41% since their peak in July as sentiment has  eased on a lack of revenue growth acceleration and steep valuation premium to traditional UK supermarkets. Ocado dominates the UK online grocery market and is the best in class. The Ocado Smart Platform provides the company with the industry’s highest cash flow return to assets and it is working with potential international partners to lease its platform, potentially providing a new high margin business. Ocado surprised on Q1 retail gross revenue which will change sentiment and valuation over the coming quarters. In addition we believe Ocado is a story about expanding margins which will further support the rise of its share price. 

Valuation

Ocado is valued at 12-month forward EV/EBITDA 16.4x compared to its European peers at 10.1x translating into a 62% premium. Despite a steep premium it is still very low historically. Ocado should trade at a premium due to higher sales growth, twice its peers, and a significantly better cash flow generation on assets which is a testimony to the competitive strength of online supermarkets over its brick-and-mortar peers. We believe online supermarkets have reached an inflection point and growth will continue to be very high.

Key risks

Pricing pressure in UK supermarket industry. More direct competition  from Tesco in online grocery sales. Lower market share.

Parameters

Buy Ocado shares (OCDO:xlon) at market with a trailing stop - the  stop price is set at 219 (volatility based) with step size of 6. Our target is 350.

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— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
4y
Neil D Neil D
Still a stock that might cause plenty of indigestion due to continuing high investment costs, the legacy of 15 years of unprofitability (till last year), and weak profit potential going forward...........take some Omeprazole first!
4y
fxtime fxtime
Agree Neil D....also two other new major concerns.....Amazon and John Lewis Group. The latter already uses OCADO for home deliveries in rural areas where it is more expensive to do home deliveries but Waitrose (John Lewis group) are steadilly building their own home delivery service for the more efficient and cost effective home delivery within inner cities especially London. Ocado has to renegotiate and renew its contract with this company next year.
4y
Neil D Neil D
I must admit the reasons to not invest in this company have have always seemed to outweigh any positives- one of those equity oddballs!
4y
fxtime fxtime
Ocado is a marmite stock....you either love it or hate it. Another strangely is Morrisons who use Ocado and now supply Amazon which thus becomes a competitor to Ocado from the very same retail group ! Morrisons also have a major supply hub on the M5 but has excess supply of leased lorries and trailers on site that simply remain onsite taking nearly 20% of the site car park. If you saw the size of the car park and compare to a major motorway service station you would have comparable scale to compare. Morrisons has scale but efficiency is another matter.
4y
Neil D Neil D
Morrisons is trying v hard not to get squeezed out by the behemoths of Tescos and Sainsburys above and the German discounters below, but meanwhile is throwing all their balls in the air to see if any land favourably! Between a rock and hard place definitely..........
4y
fxtime fxtime
I like the analogy....throwing everything into the air LOL. Perhaps they should take a maximum 4% stake in their mainstream competitors so at least they accrue div and eps !
4y
Peter Garnry Peter Garnry
Neil D...you are missing the point. Cash flow from operations to asset is the higest in the industry at 20% - Tesco is < 5% and Morrison around 10% So actually it is a better business model. Positive free cash flow in 2014 and 2015.
3y
leo_100 leo_100
Peter G, are you still bullish on this stock? The outlook seems bearish rather!

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