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Is a Marks and Spencer deal just what the Ocado share price needs?

On Monday we heard that Marks & Spencer Group (LSE: MKS) might finally be moving into the online groceries business.

In a mooted tie-up with Ocado Group (LSE: OCDO), M&S could be set to buy up some of the online pioneer’s distribution centres and delivery network, though details are scarce.

Share prices

The revelation only had a modest effect on the Marks & Spencer share price. As I write, it’s up less than 1% on last Friday’s closing price, but Ocado’s is up 3%.

Ocado shares have also climbed nearly 25% since the start of 2019, and have almost doubled in value over the past 12 months. So is this the big break its investors have been waiting for?

Some are suggesting the new deal could bode the end of its agreement with Waitrose, due to expire in 2020. But Waitrose is much bigger in the groceries business than M&S, and I don’t see the sense in ditching it.

Shopping styles

When I shop, I order repeat staples and bulky items online for delivery, and for pick-and-choose items I go to real shops. The latter could be my nearby Aldi, specialised shops like my favourite butcher, or even the M&S Food store next door to Aldi.

That’s very much the way I see M&S food, as an “ooh, I wonder what they might have that’s nice today?” kind of thing, and I just wouldn’t think of it as a place to get my bulk buys of tinned, frozen and packaged basics.

Bearing in mind that both companies have kept quiet about the whole thing so far, and that we have no idea of the possible shape of any arrangement that might be forthcoming, it’s perhaps a bit early to speculate.

But, whatever might come about, I don’t really see an Ocado-M&S tie-up as being a panacea for either company, as it’s surely only going to account for a very tiny proportion of the online shopping market.

Still too expensive

Looking at Ocado, I still don’t see any justification for its soaring share price. P/E ratios have been well above 100 for the past few years, and analysts are currently expecting the firm to record losses in the next two.

And a reasonable-looking pre-tax profit of £24m forecast for 2020 would put the shares on a P/E of, wait for it… 364!

I share my colleague Rupert Hargreaves’ fears that we could see an Ocado share price crash in 2019.

Marks & Spencer, meanwhile, saw its shares plummet in the last two months of 2018, but they’ve recovered so far in 2019 after a not-too-bad update for the Christmas quarter.

Total UK sales fell by 2.7%, with like-for-like sales down 2.2%, which is perhaps not too bad in the current economic climate. But how long can M&S keep on recording slightly declining sales?

Uncertain direction

Right now, I don’t think M&S can decide what it wants to be. Is it a food company trying to compete at the upmarket end of the supermarket business?

Is it a clothing retailer going head to head with the likes of Next, or even Boohoo and ASOS? Or are homewares where it’s supposed to be at?

I wonder if the next few years might even see some sort of split?

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. 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.