Is the Ocado share price a FTSE 100 flyer I’d still buy today?

G A Chester weighs up the prospects and share price of FTSE 100 (INDEXFTSE:UKX) massive riser Ocado Group plc (LON:OCDO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Ocado (LSE: OCDO) share price has absolutely flown over the last 18 months, from under 300p to a recent all-time high of 1,435p, which values the business at a cool £10bn.

During the period, the online grocer and designer of highly automated warehouses has announced a string of deals with international retailers and a domestic joint venture with Marks & Spencer. It’s also been rewarded with promotion to the elite FTSE 100 index of the biggest London-listed companies.

Remarkably, for a UK blue-chip, Ocado can’t be valued on a multiple of its earnings. It’s not currently making a profit, and isn’t forecast to do so any time soon. Here, I’ll give my view on its prospects and share price. I’ll also discuss a profitable but more prosaic warehouse specialist: self-storage firm Lok’n Store (LSE: LOK).

Growth in store

Lok’s shares have moved modestly higher on the back of interim results today. At 500p, this AIM-listed firm is valued at a bit under £150m. I like the dynamics of the self-storage industry in the space-strapped UK, and I’ve previously written bullishly about both Lok and its sector peer Big Yellow — a larger (FTSE 250-listed) company, valued at £1.7bn.

Today’s results confirmed my good impression of Lok as a strongly growing business in a structurally under-supplied market. Revenue from continuing operations increased 11.5%, and earnings per share rose 22.2%. Further growth is in the offing with the company having a current pipeline of eight contracted stores, which will add 27% more trading space to its portfolio.

While Ocado can’t be valued on earnings, Lok’s earnings valuation is looking a little stretched at the moment, after a strong performance from its shares over the last 12 months. The outlook for the business is good, but at the current share price, you’ll have pay 39 times forecast earnings to buy in, and get a prospective 2.4% dividend yield. I rate the stock a ‘hold’ at this stage.

Microsoft of retail?

How can we even begin to value Ocado? Well, let’s start with the UK grocery retail business that it’s putting into the 50/50 joint venture with M&S. The deal values the JV, which will trade as Ocado.com, at £1.5bn.

Even if the JV’s worth a bit more than that, it’s clear that by far the larger part of Ocado’s £10bn market capitalisation is the valuation being attributed to the company’s other business of constructing and operating automated warehouses — or Customer Fulfilment Centres (CFCs) — for third parties.

I read one research note, following Ocado’s latest deal, which attempted to answer the key question: what’s priced in already by the market? The analysts (at SocGen), using “favourable assumptions,” said: “We calculate that the ‘market’ is factoring in c.30 additional CFCs over and above the 25 already contracted for.” As you might guess from that, SocGen concluded the stock is “significantly overvalued.”

More bullish brokers have championed Ocado as a technology stock — the “Microsoft of Retail,” as Peel Hunt has put it. However, I think my Foolish colleague Roland Head is on the mark in pointing out that Ocado can’t scale up like a true tech firm.

On balance, I think the risk of overvaluation is high after the terrific rise in the share price. If I held the stock, I’d probably be happy to sell and bank my profits at this stage.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »