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Where next for Ocado shares after rising 6% since Friday?


ArvinIG

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The Ocado share price has risen 6% since Friday, as news of the Omicron variant caused the FTSE 100 to fall nearly 4%. Ocado shareholders could see their investment surge if lockdowns are reintroduced.

ocado.png
  Source: Bloomberg
 

The Ocado (LON: OCDO) share price rose 5% on Friday to 1,830p by close. Today, it’s still rising, up a further 1% to 1,845p as I write. And it’s up 2% over the past month.

In the medium term, the online grocer’s stock has performed less well. It struck a 2021-high of 2,808p on 5 February, and has since lost 34% of its value. But long-term investors have seen significant returns. On 24 November 2017, it was 239p, and even accounting for its decline this year, Ocado is still up 672% in just over four years.

News of the Omicron variant last week saw the FTSE 100 fall almost 4%, with Ocado one of the few winners. Some investors believe that a potential return to lockdowns could send its revenue growth soaring. Others, having missed out on 2020’s rally may now see an opportunity. On 28 February 2020, Ocado was worth 1,064p per share, before rising to a record high of 2,819p by 25 September 2020. Some may even be buying the stock as a hedge for their portfolios.

Ocado share price: Q3 FY21 results

Q4 results are due on 14 December, but recent figures can be found in Q3 results, that span the 13 weeks to 29 August. The headline was revenue falling 10.6% year-on-year from £578.8 million to £517.5 million.

However, the retailer said it was a ‘period best looked at as two distinct halves; before and after the fire at the Erith Customer Fulfilment Centre on July 16th.’ Until the fire, revenue was only down 1.8%, and customer orders had increased by 22%. Moreover, the lockdown era saw Q3 2020 revenue soar 58% compared to Q3 2019. For context, the most recent quarter’s earnings were up 38% compared to Q3 2019.

But revenue fell 19% during the seven weeks after the fire, with the company estimating that it lost around 300,000 orders worth £35 million. After insurance, the net cost of the fire was £10 million. It’s possible that the negative share price movement since has been caused by a lack of investor comprehension that this is a one-off cost. In addition, Ocado added 64,000 customers bringing its total to a record 805,000.

Chairman Tim Steiner believes that ‘Ocado Retail will continue to grow market share…with our long-term outlook as compelling as ever.’

Marks and Spencer
Source: Bloomberg

Marks and Spencer buyout?

CEO Melanie Smith spoke highly of the one-year anniversary of their partnership with Marks & Spencer whose share price is up 68% to 240p since 19 August. She highlighted that M & S goods ‘now represent 29% of the (Ocado) basket.’

Marks & Spencer owns 50% of Ocado since spending £750 million on the stake in 2019. The tie-up was recently covered by Deutsche Bank analyst Adam Cochrane, who said that ‘it makes strategic sense’ for M & S to purchase the remaining 50%, adding it would be a ‘big step up’ for its online strategy. While there are some regulatory issues, a full takeover bid would likely see Ocado’s share price rise.

But Ocado is facing the same pressures as its competitors. The labour shortage is forcing it to increase wages, with ‘rising costs of labour, particularly for LGV and delivery drivers…may result in up to £5m of impact to full year numbers.’ In fact, Steiner recently called on the government to add lorry drivers to its skilled shortage list, saying that it is an ‘increasingly important issue for the industry.’ Supply chain pressures are also creating stock issues, while price inflation could be hurting sales of its premium Marks and Spencer lines.

But unlike other UK supermarkets, Ocado doesn’t have physical stores. Instead, it uses robots to pick and pack online orders in specialised warehouses. Therefore, it’s unlikely be as badly affected by the labour shortage, with Smith is expecting a ‘bumper Christmas.’

And if Christmas does go well, or Marks & Spencer attempts a buyout, Ocado shares could soar. More clues for Ocado's future share price trajectory will be found in December’s Q4 earnings.

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*Based on revenue excluding FX (published financial statements, June 2020).

Charles Archer | Financial Writer, London
30 November 2021

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