Does Today’s News Make Ocado Group PLC A Better Buy Than Tesco PLC?

Shares in online grocery specialist Ocado (LSE: OCDO) are up by over 5% today after it released a trading statement. The company continues to offer strong sales growth, with gross sales for the group rising by 15.3% in the 12 weeks to 21 February. The main reason for such strong growth has been a rise in average orders per week of 16.9% during the same period, although average order size has fallen by 2.9% versus the same period last year.

Looking ahead, Ocado expects to continue to grow at a faster pace than the wider online grocery market. With a gradual shift towards online by UK grocery consumers, this bodes well for the company’s investors. That’s because it’s benefitting from industry changes that are acting as a tailwind on its top line.

Tesco the veteran

Of course, Ocado isn’t the only entity with an online presence in the grocery shopping arena. Tesco (LSE: TSCO) has been a major player in this space for over a decade and while the inclusion of large supermarkets in its store estate is acting as a drag on its financial performance, its convenience stores still offer excellent growth prospects.

That’s because, while shoppers are going online for their groceries, they’re also increasingly using convenience stores for top-up shops during the week. With Tesco having a presence in this area and Ocado not doing so, it could be argued that the former has a more appealing and diverse business model.

Furthermore, Tesco has adopted a ruthless strategy to become increasingly efficient. It’s reducing the opening hours at a number of its larger stores, has mothballed a number of major projects and has reduced its product range as it seeks to develop a more efficient supply chain. These changes won’t have an instant impact, but in the coming years Tesco is expected to deliver impressive growth numbers.

In fact, in the 2017 financial year Tesco is forecast to increase its bottom line by 78%, followed by growth of 32% in the following financial year. These numbers compare favourably to those of Ocado, which is due to report a rise in net profit of 35% in the current financial year, followed by growth of 57% in the next financial year. As such, Tesco appears to have the better bottom line growth potential, while its shares also offer superior value for money compared to Ocado.

For example, Tesco has a price-to-earnings growth (PEG) ratio of just 0.5, while Ocado’s PEG is 1.1. As such, and while Ocado appears to be worth buying following its 31% share price fall in the last year, Tesco seems to be the better buy at the present time. Not only does it have superior growth prospects and a lower valuation, it’s also a more diverse business so that if online fails to deliver on its potential, it has other means through which to deliver rising profitability.

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