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Ocado Group (LSE:OCDO) is a FTSE 100 inventory that’s in peril of being relegated from the distinguished index of the UK’s largest listed corporations. That’s as a result of its share worth is down 30% since April 2023. And it’s 85% decrease than its all-time peak achieved in September 2020.
The corporate now has the second-lowest market cap on the Footsie, overwhelmed solely by St James’s Place. However regardless of this fall, I nonetheless suppose the web grocery retailer is vastly overvalued.
Some numbers
For instance this, the desk under accommodates some key monetary metrics for the corporate extracted from its accounts for the 53 weeks ended 3 December 2023 (FY23). I’ve additionally included some essential valuation measures. For comparability, I’ve added the identical information for Harbour Vitality (LSE:HBR) as disclosed in its 2023 accounts.
| Measure | Ocado Group | Harbour Vitality |
|---|---|---|
| Income (£m) | 2,825 | 2,925 |
| Revenue/(loss) earlier than tax (£m) | (403) | 470 |
| Dividend yield (%) | – | 6.7 |
| Value-to-book (PTB) ratio | 1.99 | 1.86 |
| Property (£m) | 4,429 | 7,793 |
| Borrowings (£m) | 1,462 | 401 |
To me, the latter appears in much better monetary form. And but Ocado has a inventory market valuation of £3bn. Extremely, that is 25% greater than Harbour Vitality’s.
I ought to level out that the oil and fuel producer has its personal issues. In 2022, the federal government imposed a 25% vitality earnings levy on the trade. A 12 months later, it was elevated to 35%. Mixed with different taxes, this resulted within the firm having an efficient tax fee of 95% in 2023. Not surprisingly, this has acted as a drag on its share worth efficiency.
However there are lots of different examples I might have chosen, all of which – I consider – reveal that Ocado’s shares are very costly. And for that purpose alone, I wouldn’t need to make investments.
Am I lacking one thing?
Nonetheless, inventory market valuations are supposed to be ahead wanting. They’re purported to replicate the potential of a enterprise slightly than its historic efficiency.
However in my view, Ocado is a good distance from being worthwhile, though its administrators stay optimistic about its future prospects.
They declare that its core market is massive and rising. Because the chart under exhibits, the share of groceries bought on-line is forecast to develop over the following 4 years in all of its key territories.
This could assist increase the retail arm of its enterprise.
However it should additionally create additional alternatives to license its automated warehouse know-how. The corporate additionally sees potential for letting different retailers use its ordering platform that it claims is “battle-tested” and guarded by over 2,600 patents.
In response to its web site, letting third events use its software program and know-how will additional speed up its “virtuous cycle of growth, investment and innovation”.
All this makes Ocado sound like a know-how firm. And I assume that’s the purpose. By establishing itself as a savvy tech enterprise it will likely be in a position to appeal to a better valuation a number of than an old school retailer.
However with 85% of its FY23 income coming from its three way partnership with Marks and Spencer, in my eyes it’s an internet grocery store.
Ultimate ideas
The corporate claims that it has the “operational know-how to enable our partners and customers to achieve scalability and success”. Cynics (like me) might be questioning why Ocado itself hasn’t managed to do that after over twenty years of buying and selling.
And astonishingly, the corporate’s 2022 report states: “We are just getting started on our growth journey in grocery and beyond”.
If I used to be a shareholder, I’d have run out of endurance lengthy prior to now.
