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

Should you sell Tesco PLC (LON: TSCO) and buy Ocado Group PLC (LON: OCDO) following today’s trading update?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »