I’ve never understood why anyone would want to invest in Ocado (LSE:OCDO), the FTSE 100’s online grocer.
And its results for the 53 weeks ended 3 December 2023 (FY23) haven’t changed my opinion.
No surprises
As usual, the company recorded a loss after tax. I say ‘as usual’ because in its 23-year history, it’s only ever recorded an annual profit on three occasions.
For FY23, its loss after tax was £387m, albeit an improvement on the £481m it lost during the 52 weeks to 27 November 2022.
The company currently has a stock market valuation of £4.2bn.
Taking the price-to-earnings ratio of Tesco (12.5) as a sensible benchmark for a grocery retailer, Ocado would need to have an after-tax profit of £336m, to justify its current market cap.
This means improving its FY23 result by £723m.
To achieve this, its Retail division – which accounts for 83% of its revenue and achieved a gross profit margin of 33.8% in FY23 – would need to increase its turnover by over £2.1bn (89%).
That’s why I think Ocado’s valuation is bordering on the ridiculous.
On the plus side, it could be argued that it’s really a technology business and that it will grow by licensing its online-only grocery platform to other companies around the world.
However, I remain to be convinced and don’t want to invest.
In contrast
Ocado Retail is a 50:50 joint venture with Marks and Spencer (LSE:M&S). As the former is deemed to have a controlling interest, it reflects all of the division’s results (including 100% of its sales and costs) in its financial statements, as though it owned all of the business.
M&S only records its 50% share of the result in its accounts as a single line item.
The operation is important to M&S but isn’t central to to it, whereas it is central to Ocado’s business model (and stock market valuation).
A brief history
Unlike its joint venture partner, M&S is now performing as a FTSE 100 business should. The retailer has a long history and, after a difficult few years, remains an icon of the British high street.
Between 2015 and 2020, the company’s share price fell more than 80%. That’s because it failed to embrace the internet, faced intense competition and gained a reputation for selling unfashionable clothing.
But it’s recovered strongly and its share price performance in 2023, which increased by 106%, was sublime.
Its results for the six months ended 30 September 2023 (H1 FY24) revealed a 10.6% increase in revenue to £6.1bn, compared to the same period in 2022. Its pre-tax profit increased from £208m to £326m.
Although physical stores have faced challenges as e-commerce has become more widespread, M&S has kept its shops viable by concentrating more on food retailing. Grocery sales increased 14.7% in H1 FY24, helping the division contribute 40% of operating profit.
Encouragingly, data from NIQ shows this performance is continuing. UK food sales rose by 11.6% in the 12 weeks to 27 January, beaten only by Lidl.
The company also recently reinstated its dividend, having last paid one in January 2020.
Yet to my astonishment its stock market valuation as I wrote is only £430m more than Ocado’s!
I’m going to include M&S on my watchlist, to be considered again when I next have some spare cash.
