Stock market

I want nothing to do with this FTSE 100 disaster!

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Ocado Group (LSE:OCDO) is one. FTSE 100 A stock that is at risk of being dropped from a prestigious index of the UK’s largest listed companies. This is because its share price is down 30% since April 2023. And it is down 85% from its all-time peak achieved in September 2020.

The company now has the second-lowest market cap on Footsy, beaten only by it. St. James’s Place. But despite this decline, I still think the online grocery retailer is overvalued.

Some numbers

To illustrate this, the table below contains some key financial metrics for the company extracted from its accounts for the 53 weeks ending December 3, 2023 (FY23). I have also included some key diagnostic measures. For comparison, I have included the same data. Harbor Energy (LSE:HBR) as disclosed in its 2023 accounts.

Measure. Ocado Group Harbor Energy
Income (£m) 2,825 2,925
Profit/(loss) before tax (£m) (403) 470
Dividend yield (%) 6.7
Price-to-book (PTB) ratio 1.99 1.86
Assets (£m) 4,429 7,793
Loans (£m) 1,462 401
Source: Company Annual Reports 2023 / Harbor Energy Data converted to dollars at current exchange rates.

To me, the latter looks in far better financial shape. And yet Ocado has a stock market value of £3bn. Amazingly, this is 25% more than Harbor Energy.

I should point out that oil and gas producers have their own problems. In 2022, the government imposed a 25% energy profit levy on the industry. A year later, it was increased to 35 percent. Combined with other taxes, this results in the company achieving an effective tax rate of 95% in 2023. Not surprisingly, this acted as a drag on its share price performance.

But there are many other examples I could have chosen, all of which – I believe – show that Ocado shares are very expensive. And for that reason alone, I wouldn’t want to invest.

Am I forgetting something?

However, stock market valuations mean looking ahead. They reflect the potential of a business rather than its historical performance.

But in my opinion, Ocado is far from profitable, even though its directors are optimistic about its future prospects.

They claim that their core market is large and growing. As the chart below shows, the share of groceries purchased online is forecast to grow over the next four years across all key regions.

Source: Ocado website

This should help boost the retail arm of its business.

But it will also create more opportunities to license its automated warehouse technology. The company also looks at the possibility of allowing other retailers to use its ordering platform, which it claims “War experiencedand protected by more than 2,600 patents.

According to its website, allowing third parties to use its software and technology will further accelerate its growth.The virtuous cycle of growth, investment and innovation

All this makes Ocado sound like a technology company. And I guess that’s the point. By establishing itself as an old-tech business it will be able to attract higher prices than an old-fashioned retailer.

But 85% of its FY23 revenue comes from its joint venture. Marks and SpencerIn my view it is an online grocery shop.

Final thoughts

The company claims that it has “Operational knowledge to enable our partners and customers to achieve scalability and success“Cenak (like me) must be wondering why Ocado has not managed to do this itself after more than two decades of trading.

And surprisingly, the company’s 2022 report states:We are embarking on our growth journey into grocery and beyond.

If I were a shareholder, I would have run out of patience long ago.

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