The Motley Fool

Why are shares dropping like a rock at Ocado Group plc, Stagecoach Group plc and Go-Ahead Group plc?

Shares of Ocado (LSE: OCDO) have been on a steady decline for well over a year now, but the past month has been particularly difficult as prices dropped a full 17%. The culprit was American e-commerce juggernaut Amazon and its Amazon Fresh delivery service that was rolled out across London last week. While analysts had been expecting this for months, the number of offerings, price points and positive customer reaction pointed to trouble ahead for all grocers, but none more so than Ocado.

Ocado has no stores and competes only in online delivery, so the entry of a deep-pocketed, profit-insensitive rival such as Amazon leaves open the possibility of Ocado being forced to slash prices to retain market share. This is a worrying development for a company that already runs slim margins and continues to tap debt markets to fund expansion. In the long term, the grocery business has always been one of slim margins where scale is critical and I see little prospect of a relatively small operation like Ocado successfully challenging both traditional grocers’ online offerings and the newcomer Amazon.

Problems ahead

Bus and rail operator Stagecoach (LSE: SGC) endured a rough week after news emerged that it’s majority owned Virgin Trains East Coast service will soon face direct competition. This move will likely be quite damaging for Stagecoach. How so? Well, it brought in 55% of its revenue in the last half year from UK train services where margins are already a slim 4%.

Government regulation isn’t only affecting the company’s rail services as moves to increase competition in regional bus services also threatens its margins. Devolving control over bus routes and fares to newly-elected mayors has Stagecoach investors worried that margins on these regional bus routes could fall from their current 11.8% to closer to the 7.5% that London operations post. This would be a major hit to the company’s bottom line as regional bus services provide a whopping 50% of operating profits.

Basket of woes

While transportation group Go-Ahead (LSE: GOG) also faces margin pressure from greater bus competition, that’s not the main reason its share price has collapsed 20% over the past week. Rather, the culprit was a warning from the company that investments in its Thameslink trains necessary to improve its service and operational issues would shrink margins over the lifetime of the contract from an already-meagre 3% to a downright minuscule 1.5%.

With rail services providing the bulk of revenue for Go-Ahead, this is obviously a major cause for concern. Like Stagecoach, the threat of greater regional control over buses threatens the group’s biggest source of profits. Although regional bus systems only accounted for 11% of revenue in the past six months they brought in a full 32% of the company’s operating profits.

The slim margins and increasing competition on tap for each of these three companies are reason enough for me to steer clear of their shares. I prefer my investments to offer the higher pricing power and stable revenue growth offered by the Motley Fool’s Five Shares To Retire On.

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