Online grocery retailer Ocado (LSE: OCDO) has been one of the few winners in the FTSE 100 in 2020 so far. Despite the coronavirus pandemic (or, arguably, because of it), shares in the Hatfield-based business have soared 60% since the beginning of the year.
Whether this kind of performance can continue for much longer is open to debate. For me, the old arguments against investing in Ocado remain.
Revenue up at Ocado
Don’t get me wrong – today’s headline interim numbers were good. Then again, there was no excuse for them not to be.
Ocado achieved retail revenue growth of 27.2% (to a little over £1bn) in the six months to the end of May as locked-down shoppers flooded the firm with orders. Fees from international partners relating to the construction of customer fulfilment centres (CFCs) also rose 58% to £73.7m.
Nice as all this is, ongoing investment led the company to report a pre-tax loss of £40.6m. That said, this was down from £147.4m loss reported this time last year.
A company valued at £15bn but still to make consistent profits? This, for me, is the nub of the problem with Ocado.
Priced to perfection?
I don’t disagree with CEO Tim Steiner that the growth in online ordering seen since the coronavirus arrived will lead to “a permanent redrawing of the landscape of the grocery industry worldwide“. My concern is that a lot of this is already priced in.
An improved balance sheet (net cash of £196m) is all well and good but Ocado’s growth rests on relentless investment and delivering on its contracts without a hitch. Let’s not forget that this is the same company whose app and website crashed back in March as it struggled to cope with demand. Factor in the switch from providing Waitrose to M&S products this September and there’s plenty that could still go wrong.
Tellingly, Ocado’s shares are trading lower today. Some of this may be due to news of a slower-than-expected recovery in the UK economy but I think it’s also a reflection of expectations already being sky-high.
With no change to its guidance on revenue and earnings, I’d have no hesitation in taking some money off the table if I held the shares.
A safer buy
Personally, I’d be far more likely to back life-saving technology firm Halma (LSE: HLMA). Its shares may be seriously expensive but today’s full-year results show the sort of consistency that Ocado must replicate.
Revenue and adjusted pre-tax profit jumped 11% (to £1.34bn) and 9% (to £267m) respectively in the year to the end of March. This was a record result for the 17th consecutive year. Buoyed by recent acquisitions, growth was seen in all sectors and regions in which Halma operates.
It gets better. At 16.5p per share, the total dividend is up 5%. This makes FY20 the 41st consecutive year the payout has been hiked by this percentage or more.
So, why have the shares fallen 5% today? It’s probably down to Halma stating that adjusted pre-tax profit for the new (current) financial year will likely be 5%–10% below FY2020. This is despite the company reporting “resilient” trading over Q1. Disappointing, yes, but hardly a disaster.
A global company offering life-saving equipment or a ‘jam tomorrow’ stock operating in a highly competitive sector. I know which one would keep me awake at night.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma. 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.