Will Ocado report a profit?

Ocado is attracting new customers in the UK, and continues its search for an international joint venture.

An Ocado lorry
Source: Bloomberg

Ocado will reveal its fourth-quarter trading statement on 10 December, and this will be an indication if the company will make a second consecutive annual profit.  The company will report its full-year results in February 2016, and traders are anticipating revenue of £1.11 billion and adjusted net income of £13.4 million. These forecasts equate to a 17% jump in revenue and a 78% jump in adjusted net income.

Ocado is attracting new customers at home and is still seeking an international partnership, as the lack of an overseas operation is making traders concerned for its growth prospects. The high street supermarkets are engaging in a price war, and it’s a battle to hold on to existing customers as well as enticing new clients.

Ocado is comfortably building up its customer base and sales growth is increasing at a double-digit rate. Revenues are rising but profits slipped in the first half of the year as the company made investments to aide long-term growth. It’s encouraging to see more shoppers purchasing more items, but the amount of money being spent is slipping as food prices are soft due to falling inflation.

The firm’s tie up with Morrisons and Waitrose has helped the business, but the current contract with the latter extends to 2020, and Ocado is still keen to strike a similar deal with a company based overseas. Dealers are concerned the business is too UK focused, though Ocado reiterated in its third-quarter update that it hopes to have an international joint venture lined up before the year is out.

Equity markets are very bullish on Ocado, and out of the 15 ratings, eight are buys, four are holds, and three are sells. The average target price is 415p, which is 10% above the current price.

Technical analysis from Joshua Mahony MSTA, Market Analyst at IG

Ocado’s shares have somewhat lacked direction over the recent months, trading within a symmetrical triangle pattern which necessitates higher lows and lower highs. As the pattern progresses, the price tightens, with each successive trend becoming shorter. The price is currently within a clear uptrend, since hitting triangle support back in November. For this reason, further upside seems likely until we reach the upper boundary of this pattern (currently 400p).

To gain overall direction, Ocado’s shares would need to close either above 412p for a bullish view, or below 335p for a bearish view. Until that occurs, the price is expected to remain within this triangle, with the stochastic oscillator providing good clues as to a potential reversal.

The red dashed line highlights the fact that recent stochastic crosses from within overbought (>80) or oversold (<20) have provided signals of market reversals. This could come in handy again should the share price remain within this triangle. Resistance levels of note are 381p, 400p and 412p. Support levels of note are at 335p, 330p, 313p and 309p.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.