- ‘Concerns beginning to dissipate’
- Overweight rating and 400p target
- Shares climb 15% to top FTSE 250
As anyone who has followed the Ocado (OCDO) story knows, the stock has had its ups and downs – in fairness, rather more downs than ups in the last four years – but an analyst is calling the turn with a Buy note today.
The shares reacted dramatically, as usual, jumping 38p or 15% to 288p on heavy trading volume.
TURNING MORE OPTIMISTIC
Analyst Marcus Diebel at US investment bank JPMorgan has raised his rating on the online grocer to ‘Overweight’ from ‘Neutral’, a stance he has maintained for several years, marking him out from the crowd, most of whom have a ‘Hold’, ‘Underperform’ or straight ‘Sell’ rating.
‘After being either Neutral or Underweight on Ocado since 2018, we are revisiting the investment case and identify several reasons to be more optimistic, as many of our previous concerns are beginning to dissipate,’ writes Diebel.
The analyst argues margin improvement in the Ocado Retail business should lead to positive free cash flow generation by the end of 2026 – a feat which has so far eluded the company – in turn allowing it to refinance some £500 million of convertible bonds.
Diebel also believes the increasing adoption of online shopping will drive greater take-up of its Solutions business, as traditional supermarkets look for scalable models to compete with their ecommerce rivals.
Ocado has set a target of 150 CFCs (customer fulfilment centres) by 2027, of which 123 are already operational and 27 are under construction, which the market isn’t valuing appropriately says the analyst, who raised his price target on the shares to 400p against a consensus of 343p and a low-ball estimate of 210p.
CASH FLOW IS KEY
For the year to December 2024, the company posted revenue of £3.2 billion, a 14% increase on the previous year, with roughly 14% growth in Ocado Retail and a slightly higher 18% increase in Solutions revenue.
At the level of EBITDA (earnings before interest, tax, depreciation and amortisation), the Retail business generated £44.6 million against £10.4 million the previous year while the Solutions business generated £81 million against £15.4 million the previous year.
However, on a statutory basis the group posted a loss of £374 million, barely changed from the prior-year’s £387 million, and cash flow was negative to the tune of £224 million, although this was a marked improvement from 2023’s outflow of £472 million.
The company is due to issue a trading statement at the end of April in time for its AGM (annual general meeting) and is expected to publish its 2025 interim results in July.
The shares recently touched 225p, their lowest level since 2018, and as well as being dropped from the FTSE 100 the stock was recently dropped from the S&P Global 1200 index and the S&P Europe 350 index.
