Is the Ocado share price a FTSE 100 flyer I’d still buy today?

G A Chester weighs up the prospects and share price of FTSE 100 (INDEXFTSE:UKX) massive riser Ocado Group plc (LON:OCDO).

| More on:

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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Ocado (LSE: OCDO) share price has absolutely flown over the last 18 months, from under 300p to a recent all-time high of 1,435p, which values the business at a cool £10bn.

During the period, the online grocer and designer of highly automated warehouses has announced a string of deals with international retailers and a domestic joint venture with Marks & Spencer. It’s also been rewarded with promotion to the elite FTSE 100 index of the biggest London-listed companies.

Remarkably, for a UK blue-chip, Ocado can’t be valued on a multiple of its earnings. It’s not currently making a profit, and isn’t forecast to do so any time soon. Here, I’ll give my view on its prospects and share price. I’ll also discuss a profitable but more prosaic warehouse specialist: self-storage firm Lok’n Store (LSE: LOK).

Growth in store

Lok’s shares have moved modestly higher on the back of interim results today. At 500p, this AIM-listed firm is valued at a bit under £150m. I like the dynamics of the self-storage industry in the space-strapped UK, and I’ve previously written bullishly about both Lok and its sector peer Big Yellow — a larger (FTSE 250-listed) company, valued at £1.7bn.

Today’s results confirmed my good impression of Lok as a strongly growing business in a structurally under-supplied market. Revenue from continuing operations increased 11.5%, and earnings per share rose 22.2%. Further growth is in the offing with the company having a current pipeline of eight contracted stores, which will add 27% more trading space to its portfolio.

While Ocado can’t be valued on earnings, Lok’s earnings valuation is looking a little stretched at the moment, after a strong performance from its shares over the last 12 months. The outlook for the business is good, but at the current share price, you’ll have pay 39 times forecast earnings to buy in, and get a prospective 2.4% dividend yield. I rate the stock a ‘hold’ at this stage.

Microsoft of retail?

How can we even begin to value Ocado? Well, let’s start with the UK grocery retail business that it’s putting into the 50/50 joint venture with M&S. The deal values the JV, which will trade as, at £1.5bn.

Even if the JV’s worth a bit more than that, it’s clear that by far the larger part of Ocado’s £10bn market capitalisation is the valuation being attributed to the company’s other business of constructing and operating automated warehouses — or Customer Fulfilment Centres (CFCs) — for third parties.

I read one research note, following Ocado’s latest deal, which attempted to answer the key question: what’s priced in already by the market? The analysts (at SocGen), using “favourable assumptions,” said: “We calculate that the ‘market’ is factoring in c.30 additional CFCs over and above the 25 already contracted for.” As you might guess from that, SocGen concluded the stock is “significantly overvalued.”

More bullish brokers have championed Ocado as a technology stock — the “Microsoft of Retail,” as Peel Hunt has put it. However, I think my Foolish colleague Roland Head is on the mark in pointing out that Ocado can’t scale up like a true tech firm.

On balance, I think the risk of overvaluation is high after the terrific rise in the share price. If I held the stock, I’d probably be happy to sell and bank my profits at this stage.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

How I’d aim to transform an empty Stocks & Shares ISA into £1m of wealth!

There's never a better time to start investing in a Stocks and Shares ISA than today. Here's how I'd aim…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Investing £14,708 in this FTSE 100 stock could earn me £1,000 per year in passive income

Is a CMA investigation into anticompetitive practices the cloud cover Stephen Wright needs to start buying shares in a FTSE…

Read more »

Investing Articles

Despite rising 152% in a year, is Rolls-Royce’s share price still a bargain?

While Rolls-Royce’s share price has shot up recently, it still looks very undervalued against its peers, and the business looks…

Read more »