Ocado Surges to Two-Year High as Goldman Raises Stock to Buy
Ocado Group Plc, (OCDO) the U.K.’s largest online-only grocer, jumped to the highest in more than two years in London trading after Goldman Sachs Group Inc. raised the stock to buy, saying sales growth is set to accelerate.
The shares rose as much as 20 percent to 250.3 pence, the highest price since Feb. 21, 2011.
Goldman analyst Franklin Walding said today that he expects Ocado to generate 20 percent sales growth in 2017 as the opening of a second distribution center in central England eases capacity constraints. He estimates that the company will have an 8 percent share of the U.K. online grocery market by 2030.
“Ocado’s online food retail business model has an inherent advantage relative to traditional peers,” Walding wrote in a report. “Its lower capital intensity means the group can successfully operate at a lower margin than store-based peers.”
Ocado shares have almost tripled this year on optimism that the new warehouse will help accelerate sales growth and after the company said in March it’s in talks with William Morrison Supermarkets Plc (MRW) to license some of its Web-shopping technology. Those discussions are continuing, the company said today in a statement, adding that its supply agreement with the Waitrose grocery chain won’t be affected by the potential tie-up.
Any agreement with Morrison would be “complementary to Ocado’s existing partnership with Waitrose, which would be unaffected,” said the Hatfield, England-based company.
Ocado traded at 233.4 pence as of 10:20 a.m., up 12 percent and valuing the company at 1.4 billion pounds ($2.2 billion).
“The bounce today is down to Goldman’s upgrade and the fact that Ocado is a highly shorted, low liquidity stock, so even a tiny bit of news has a big impact on the share price,” said Andrew Gwynn, an analyst at Exane BNP Paribas in London who has a buy recommendation on the stock. “That also explains why the share price has moved so much in recent days.”
Ocado said March 14 it had started talks with Bradford, England-based Morrison to support the start of the supermarket chain’s online business next year. Any partnership won’t involve a takeover or Morrison acquiring a stake, it repeated today.
Not all analysts have a positive opinion on Ocado.
“The shares have been squeezed up by the hope that strategic value could be about to be unlocked by corporate activity, but the reality is that the strategic value in Ocado is substantially lower than these unrealistic expectations anticipate, because it remains a fundamentally flawed model,” Philip Dorgan, an analyst at Panmure Gordon, said in a note today. He maintained a sell recommendation on the shares.
Ocado also said today that sales have continued to rise and that “the board is encouraged by the progress of the business so far this year, and believes the company is well placed to exploit the fast growth in online grocery retailing.”
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