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Ocado Group (LSE:OCDO) is a FTSE 100 inventory that’s at risk of being relegated from the distinguished index of the UK’s largest listed corporations. That’s as a result of its share value 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, crushed solely by St James’s Place. However regardless of this fall, I nonetheless suppose the web grocery retailer is vastly overvalued.
Some numbers
As an example this, the desk beneath 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 vital 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 seems to be in much better monetary form. And but Ocado has a inventory market valuation of £3bn. Extremely, that is 25% larger than Harbour Vitality’s.
I ought to level out that the oil and gasoline producer has its personal issues. In 2022, the federal government imposed a 25% vitality earnings levy on the business. A 12 months later, it was elevated to 35%. Mixed with different taxes, this resulted within the firm having an efficient tax charge of 95% in 2023. Not surprisingly, this has acted as a drag on its share value efficiency.
However there are numerous different examples I might have chosen, all of which – I consider – show that Ocado’s shares are very costly. And for that purpose alone, I wouldn’t wish to make investments.
Am I lacking one thing?
Nonetheless, inventory market valuations are supposed to be ahead trying. They’re alleged to replicate the potential of a enterprise fairly than its historic efficiency.
However in my view, Ocado is a great 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 beneath exhibits, the share of groceries bought on-line is forecast to develop over the subsequent 4 years in all of its key territories.
This could assist increase the retail arm of its enterprise.
However it can additionally create additional alternatives to license its automated warehouse expertise. 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 line with its web site, letting third events use its software program and expertise will additional speed up its “virtuous cycle of development, funding and innovation”.
All this makes Ocado sound like a expertise firm. And I assume that’s the purpose. By establishing itself as a savvy tech enterprise it will likely be capable of entice the next valuation a number of than an old style 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.
Last ideas
The corporate claims that it has the “operational know-how to allow our companions and prospects to attain 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’re simply getting began on our development journey in grocery and past”.
If I used to be a shareholder, I’d have run out of endurance lengthy prior to now.
