The Motley Fool

Ocado Group PLC Turns A Profit Thanks To WM Morrison Supermarkets plc

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.

Ocado Group (LSE: OCDO) published its results for the year ending 1 December 2014 today, revealing a post-tax profit of £7.2m — the firm’s first annual profit in its 15-year history.

Unsurprisingly, markets have reacted positively to the news, and the online supermarket’s shares are up by around 6% as I write.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Morrisons saves the day

Ocado’s 25-year, £200m deal to provide an online delivery service for Wm Morrison Supermarkets (LSE: MRW) was a key factor in last year’s results.

The deal resulted in £45.1m of fees and costs being charged to Morrisons last year, and increased Ocado’s post-tax profit by around 50%, based on my calculations.

Despite this, it’s worth noting that Ocado’s first full-year profit fell significantly below expectations — the latest consensus forecasts indicated a post-tax profit of £12.9m, 79% more than the £7.2m reported today.

Is Ocado a safe buy?

Sadly, I’m not convinced that Ocado is a safe buy at today’s share price. In my view, the firm’s valuation simply doesn’t make sense when compared to those of other supermarkets.

Ocado shares are currently trading at 346 times 2014 earnings, yet Ocado’s 1.7% operating margin suggests it is unlikely to be more profitable than regular supermarkets, despite the boost provided by the Morrisons deal.

Indeed, it’s reasonable to argue that all the main supermarkets could report operating margins of 1.5-2% over the next year or so.

Given this, it’s interesting to note that while Morrisons trades on a price to sales ratio of around 0.25, Ocado trades on a price to sales ratio of 2.6. This implies that Ocado’s sales are more valuable than those of Morrisons — but I can’t see any reason for this.

Here’s the problem

Despite being an online business, Ocado can’t scale cheaply: it employs a lot of people and has high distribution and logistics costs.

Ocado’s total distribution and administrative costs rose by 25% last year, but sales only rose by 15%.

One reason for this might be that Ocado created 1,800 jobs last year — nearly double the 1,000 people it was expecting to hire. In 2015, the firm expects to employ another 2,500 people.

Ocado is also dangerously dependent on other, much larger businesses — both Waitrose and Morrisons might decide to use their muscle to negotiate better terms from Ocado over the next year.

In my view, Ocado rates as a sell — it’s simply too expensive and is unlikely to provide a reasonable return for investors at today’s price.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Roland Head owns shares in Wm Morrison Supermarkets and has a short position in Ocado Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.