The stars seem to be aligned for Ocado (LSE: OCDO), Thomas Cook (LSE: TCG) and IGAS Energy (LSE: IGAS) — but are the good times set to last for their shareholders into the second quarter and beyond?
Here are a few things you should take into account before deciding whether to invest or not in the three companies.
Performance
All three stocks bucked the trend of a declining market yesterday. Today, Ocado is up almost 2%, while Thomas Cook and IGAS have risen by 3% and 7%, respectively. Short-term trends do not dictate strategy, and while there’s a lot to like in their recent performances, there are obvious risks to me surrounding these three names.
With Ocado, for instance, a high valuation and thin margins must be supported by a lot of growth to render it a palatable investment. Once these elements are considered, I’d stay put at 393p, where the shares currently trade.
Thomas Cook’s valuation has been boosted by upbeat reviews from analysts in recent times. At 160p, the risk is that quarterly results will disappoint next week — based on the fair value of its assets, I’d feel more comfortable buying into the stock at 135p-145p.
A change in leadership has played a big part in IGAS’s success on the stock market since Friday, but I need more evidence to be convinced of the opportunity it offers to value investors. In fact, the ambitious plans of IGAS, the largest shale gas developer in the UK, hinge on ambitious funding plans, which may or may not be sustainable.
Valuation
If forecasts are right, Ocado’s operating margin and net income margin will rise to 3.2% and 2,6%, respectively, by the end of 2017, for an implied 2017 p/e multiple above 50x, and that’s based on a 15.6% compound annual growth rate for revenues, which is three percentage points below the level of sales growth between 2012 and 2014. Ocado must pay attention to its cost base and its capex needs.
Elsewhere, Thomas Cook stock is not expensive based on trading metrics, but is likely to present a similar level of volatility to that of Ocado in months ahead. Its share price has been boosted by upbeat research from Goldman Sachs and Credit Suisse — the former is more cautious, though, with a price target of 125p, while the latter suggests a price target of 180p, which is 20p higher than Thomas Cook’s current valuation of 160p.
At present, I’d be inclined to close the trade if I were invested.
Things are a bit more complex with IGAS.
IGAS
Shale gas is a hot topic in the UK, and IGAS may offer long-term value, although its financials aren’t particularly reassuring in spite of recent support from trade partners. Hence, it remains a risky investment, and one that will not pay dividends for some time, as you might imagine.
A cash injection from Swiss chemicals group Ineos gives it room for manouvre until the end of the year, yet forward net leverage remains just below the safety threshold, in my view, and high interest costs weigh on its earnings profile.
The departure of Andrew Austin, chief executive and co-founder, has helped its stock rise since Friday (to above 40p from from 28p); investors seem to be betting on deeper ties with Ineos or other players. If you are not a risk taker, you would do well to steer clear of it until more clarity is being provided with regard to its projects pipeline and total funding needs.
