Ocado - is it vastly overpriced?

Sunday, Jan 19 2014 by

Food retailer Ocado (LON:OCDO) recently published its 2013Q4 results, which saw sales up 20%. It collaboration with Morrisons is starting to bear fruit. There is considerable price momentum in the company, and bears are, understandably, probing for weakness to see if it’s a good shorting candidate.

Personally, I think £400m would be a more realistic valuation for OCDO, and I expect that many think it should be lower still. Even if I put on my Fantasy Hat I could only come up with a valuation of £1400m; less than half of its current valuation at £3.1b.

How did I arrive at that figure? By being really lazy and optimistic! I assumed that it could do about £4b in revenues in about 10 years. That may sound a stretch, but OCDO is growing its revenues by around 16%pa. So, it could potentially quadruple sales over 10 years. If it could earn a 3% net profit margin on that, it would be earning around £120m in a decade’s time. Slap on a pricing multiple of 15, and discount that over a decade at the risk-free rate of about 2.9%, and you come up with a valuation of about £1400m (~ 120 x 15 / 1.029^10). See, I told you I was being lazy!

I have, of course, made a vast array of assumptions which many can pick apart as laughable. The most egregious assumption I think I’ve made is that I have I am assuming that OCDO can fund expansion without tapping shareholders. That’s a big assumption, and would imply that OCDO was even more overpriced if that assumption proved to be incorrect. Deutsche Bank recently noted, for example: “Ocado’s margins were already so low that any additional investment would revive cash flow concerns”.

Digital Look reports that 2 brokers rate OCDO as a strong buy, and 5 as a strong sell. Goldman Sachs is their corporate broker, the directors have strong links with them, and, given the expansionary nature of the company, I would expect it to be a nice little fee-earner for the Goldman. Needless to say, they rate OCDO a buy. Digital Look may be a little outdated, though, as I think that Numis downgraded it yesterday from Buy to Add. I’m not sure where Numis are coming from with their recommendation. Maybe they just let the trend be their…

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Ocado Group plc is a United Kingdom-based online grocery retailer. The Company's principal activities are grocery retailing and the development and monetization of Intellectual Property (IP) and technology used for the online retailing, logistics and distribution of grocery and consumer goods, derived from the United Kingdom. The Company offers end-to-end operating solution for online grocery retail based on technology and IP, suitable for operating its own retail business and those of its commercial partners. The Company's brands include Ocado, Ocado Smart Platform, Sizzle, Fetch and Fabled. Sizzle is a kitchen and dining store. The Company's Ocado Smart Platform is a solution for operating online retail businesses. The Company's Ocado Smart Platform combines its end-to-end software and technology systems with its physical fulfilment asset solution. more »

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2 Comments on this Article show/hide all

shipoffrogs 19th Jan '14 1 of 2

An even lazier way of looking at it - Tesco has a MV nine times greater than Ocado and sales nearly 100 times greater. And Tesco does on line groceries too.

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mpat89 19th Jan '14 2 of 2

Wonder what the leading fallers will be should we enter a bear market, presumably this is one of the 'bubbles' we should have seen coming.

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About Mark Carter

Mark Carter

I am a private investor living in Scotland. I am a computer programmer by trade.


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