Ocado Leads European Stock Gains in 2013 on Transformative Deal

Ocado Group Plc, the Internet-only grocer that last year was fighting for survival, is Europe’s best performing major stock this year after an agreement with William Morrison Supermarkets Plc transformed its outlook.

Ocado shares ended 2013 at 441.6 pence, a gain of 410 percent for the year and more than double the 180 pence at which they were sold in a 2010 initial public offering. That made the online retailer the best performer in the Stoxx 600 Index, Europe’s benchmark indicator, ahead of Vestas Wind Systems A/S and Thomas Cook Group Plc.

Shares in Ocado, which has yet to make an annual profit, surged on optimism that the company will be able to strike more deals like its 25-year accord with Morrison, which potentially puts a higher value on its Web and logistics technology than the retail business. Under the deal, Ocado will help Morrison to make a belated entry into online grocery next month.

This year’s “stratospheric share price performance was a function of being in the right place at the right time, which is no bad thing and all due credit to management,” said Clive Black, an analyst at Shore Capital in London.

While the company may forge further alliances and has “tremendous” technology, “whether such capabilities can translate into meaningful cash flows that drive the group’s operating profits and so share price higher, well, we’re not so sure,” Black said by e-mail.

Record Low

Two years ago, Ocado shares were languishing near a record low of 52.1 pence on concern about the company’s future. Ocado said in March 2012 that a “material reduction” in forecast earnings could lead to a breach of covenants under a 100 million-pound ($165 million) credit facility. This year’s agreement with Bradford, England-based Morrison wiped out the company’s debt and left it with cash for expansion.

While Ocado has had approaches from a number of international retailers interested in its technology, the company’s first priority is the start of Morrison’s online business, Chief Executive Tim Steiner has repeatedly said.

Sales next year will approach 1 billion pounds, Steiner told Bloomberg News on Oct. 9. Exane BNP analyst Andrew Gwynn estimates that 2014 is going to be the year that Ocado “will finally make a profit.”