Forget Ocado, buy Tesco shares instead?

I think it’s fair to say that Tesco (LSE:TSCO) shares are seen by many investors as being a little unfashionable. The company has been in existence since 1919 and generates the majority of its revenue from its bricks and mortar stores.

Compared to Ocado (LSE:OCDO) — which was founded in 2000 and is a 100% online business — the UK’s largest grocer is a bit of a dinosaur. Ocado claims to be a technology company whereas Tesco is a retailer.

But when it comes to the performance of the stocks of these two companies, there’s a clear winner.

Over the past three months, six months, and one year, Ocado is the worst performing member of the FTSE 100.

Since May 2022, its shares have fallen by 45%. Over the same period, Tesco’s stock is up 4%.

A basket case?

Since 2018, Ocado has racked up pre-tax losses of £989m, despite growing its revenue by 57%. This means it’s not in a position to pay a dividend.

In contrast, over the past five years, Tesco has made a pre-tax profit of £6.3bn.

And it has a long track record of returning cash to shareholders. Its stock is currently yielding 4%. This may not rank among the highest in the FTSE 100, but it’s above average.

Tesco has a price-to-earnings (P/E) ratio of around 12. This is the same as J Sainsbury.

Due to its losses, it’s not possible to calculate a figure for Ocado. But it would have to be making a profit of £275m (it made a loss of £501m in 2022) to have the same P/E ratio as its two rivals.

The marketplace

I believe the claim that long-established grocers are under threat from ‘discounters’, such as Aldi and Lidl, as well as online retailers, may be exaggerated.

In the face of intense competition, Tesco’s share of the UK grocery market has remained stable in recent times.

IGD Retail Analysis is forecasting the sector to grow by 11% over the next five years. If correct, Tesco will be able to increase its revenue even if its market share remains stagnant.

Supermarkets and hypermarkets are expected to account for £114bn of the UK’s £241bn grocery market by 2027. This compares to £27bn for online retailers. Although the latter is growing faster, it seems there’s a long way to go before the majority of shoppers stop visiting physical stores, and choose to get their groceries delivered instead.

Chalk and cheese

If I was forced to choose between these two stocks, I’d pick Tesco over Ocado.

I struggle to see how the challenger will become profitable in the short term. Ominously for shareholders, its 2022 annual report states: “We are just getting started on our growth journey“. This makes me wonder what the directors have been doing for the past 20 years!

In my view, Tesco is a solid and reliable company. It doesn’t attract the hype that Ocado does but, sometimes, slow and steady wins the race. The company has restored its reputation that was tarnished by the 2014 accounting scandal, and remains the UK’s most popular supermarket.

I’m therefore going to put the stock on my watch list for when I next have some spare cash.