The UK supermarket sector has been in the news recently for all the wrong reasons. As Alastair McCaig pointed out, the profit warning from Tesco yesterday dragged the industry lower. Ocado has yet to report a full-year profit and judging by the first-half and third-quarter figures it could on the cusp of making its maiden annual profit.
The share price jumped to 452p in July when the company swung from a pre-tax loss of £3.8 million to a pre-tax profit of £7.5 million for six months until the 19 May. Revenue rose by 20% over the same period. Traders were concerned that the rate of sales growth slipped by 25% between the first and second quarter. In September the retailer reported a 17% increase in average orders per week and a 1.7% rise in the average order value during the third quarter.
CEO, Tim Steiner, described the market as ‘competitive’ but with the development of a third depot on the horizon in Andover, this indicates that it is confident of its position within the industry. Ocado’s joint venture with Morrisons is proving to be profitable and a similar arrangement with Waitrose will run until March 2017.
Profit margins at the big four supermarkets are being squeezed as they engage in a price war with Lidl and Aldi. According to the IGD, the UK online grocery sector will double in value between now and 2019. Ocado is already facing competition from the online divisions of the big household names but delays on Marks & Spencer at the weekend may give Ocado the edge in the run up to Christmas.
Ocado will post its full-year figures in February, and analysts are expecting revenue of £948 million and adjusted net income to be £9.96 million. These projections represent a 20% increase in revenue and a 331% jump in adjusted net income.
Investments banks are a bit bearish on the company and out of the 13 recommendations, four are buys, three are holds and six are sells. The average target price is 350p which is 5% above the current price. Equity analysts are even more bearish on Morrisons and out of the 23 ratings, six are buys, five are holds and 12 are sells. The average target price is 186p which is 4% above the current price.
The share price is receiving immediate support from the 50-hour moving average at 334p, and if this level is broken support is likely to be found at 300p. If the stock breaks through the 200-day moving average of 350p it could target 400p.