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 Ocado.com, 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.