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Is Ocado Group PLC A Better Grocery Pick Than Tesco PLC And J Sainsbury plc?

Shares in online grocery house Ocado (LSE: OCDO) have enjoyed a bumper start to the week, the firm’s 8% rise making it the biggest FTSE Ocadoriser in Monday trading.

Investor appetite has been helped by news of super sales growth at internet takeaway specialists Just Eat, and here I explain why Ocado should continue heading skywards.

The right recipe for revenue success

The business reported in September that gross retail sales surged 15.5% during May-July, to £218.5m, with the average number of orders galloping to 163,000 per week from 139,000 during the corresponding 2013 quarter.

These are figures which mid-tier operators like Tesco (LSE: TSCO) and Sainsbury’s (LSE: SBRY) can only dream of — the former saw UK sales excluding fuel droop 3.2% in June-August, while the latter punched a 0.8% decline in its most recent quarter spanning July-September.

Ocado is not immune to the problems facing its rivals, of course, where the march of discount chains like Aldi and Lidl is forcing heavy discounting across the sector.

But, of course, the firm centres solely on the sweet spot of online grocery, sectors in which Tesco and Sainsbury’s only derive a fraction of total profits. In particular, the steady rise in tablet PCs and smartphone sales has helped orders to steam higher at Ocado, and delivery firm Hermes reported recently that almost a quarter of all Brits shop regularly using mobile technology.

Indeed, Ocado underlined the potential of the “m-commerce” market when it launched its Scan & Shop app late last month. The software enables shoppers to add items to their basket by simply scanning the barcode of items in their home using their device.

Delicious earnings growth on the table

With the huge growth potential of internet shopping in mind, City analysts expect the business to flip from losses of 0.88p per share in the 12 months concluding November 2013 to earnings of 2p this year. And a colossal 129% advance is forecast for fiscal 2015 to 4.5p.

At current prices it could be argued that these exceptional growth forecasts are already baked into the price, with the firm dealing on a stratospheric P/E rating of 127.8 for 2014.

But next year’s vast earnings improvement more than halves this to 55.9 times prospective earnings, and the firm’s decent price relative to its growth potential is underlines by a price to earnings to growth (PEG) readout of 0.4. Any number below 1 is generally considered too good to pass up.

So while the likes of Tesco and Sainsbury’s are set to continue suffering the effects of an increasingly-fragmented grocery sector, I believe that Ocado’s position at the top of the online marketplace — and consequent ability to fend off profits stagnation — merits this premium price.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.