Is Ocado about to drop out of the FTSE 100?

Ocado, perhaps the FTSE 100’s only real growth stock, looks set to be demoted from the index. Dr James Fox explores whether it’s worth him buying.

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Image source: Ocado Group plc

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Being demoted from the FTSE 100 can be a blow for a company, and Ocado (LSE:OCDO) stock is in danger of dropping out of the lead index. Currently, it’s the 114th most valuable company on the UK stock market with a market value of £3.1bn.

There are a few reasons why being demoted is perceived particularly negatively, other than the obvious cause that the stock’s performed worse than the index.

For one, it’s a loss of prestige. Demotion can be seen as a sign of a struggling company, potentially damaging a stock’s reputation with investors. And, trust me, sentiment’s incredibly important.

Next, many investment funds track the FTSE 100. This means they automatically buy and sell shares of the companies in the index. If Ocado leaves, several tracker funds will pull their investments in the online grocer-cum-tech firm.

Finally, there’s negative reporting. When companies get demoted, they often end up in the press with analysts dissecting what’s gone wrong. One again, this can damage a company’s reputation.

Underperforming the FTSE 100

The FTSE 100’s at record highs — at least at the time of writing — but growth-oriented Ocado isn’t performing well. The stock’s down 28.5% over the past 12 months. But it hasn’t been a steady decline. The company’s share price pumped up to £10.17 in summer 2023 and has plummeted back to £3.52.

So why? Well, when Ocado was launched as an online retailer in the UK, there wasn’t much competition. But this has all changed in recent years, with most UK supermarkets delivering.

In theory, with its super-efficient robots and no retail outlets, Ocado should be generating great margins or cheaper prices — that doesn’t seem to be happening.

While there has been much talk of grocery shopping moving online, the lack of progress is highlighted by the latest Kantar figures. According to the global data provider, Ocado has just 1.9% of the UK market at the moment.

Ocado’s ‘hidden’ potential

Some people may be surprised to hear Ocado isn’t just an online grocer. It’s also a technology stock. The group’s tech division provides robotic warehouse systems for other retailers — known as the Ocado Smart Platform (OSP). It’s by far the company’s biggest revenue generator.

The FTSE 100 firm has signed up several foreign retailers as clients over the last few years. These have included US retail giant Kroger — America’s largest grocery retailer — and Coles in Australia. In its 2023 results, Ocado noted it had signed its 13th retailer.

FTSE 100 restoration

It seems inevitable that Ocado will be demoted to the FTSE 250 at the end of the quarter unless it surprises the market with a strong trading update.

But could it ever recover? Well, I’d like to think so, but the forecasts really aren’t that strong. Earnings per share are expected to come in at -42.7p in 2024, -36p in 2025 and -37.2p in 2026. Clearly, there’s not much in the way of a stable progression towards profitability.

Personally, I’m keeping my powder dry.

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.

James Fox 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.

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