Merryn's Blog

Ocado still isn't worth buying

Ocado wasn't worth buying into when it floated on the stock exchange, and it still isn't worth buying now. Here's why.

Can you trust a stockbroker? Anyone who thinks the answer is 'yes' might take a look at the recommendations now coming out for online grocery delivery company Ocado.

The company was brought to market back in July by, among others, UBS, HSBC and Goldman Sachs. The market wasn't much impressed. The big banks had been hoping to get the shares away at up to 275p each. They had to settle for 180p. And the shares have been falling pretty much ever since. They now change hands at 150p.

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We wrote about our views on Ocado before its float - Don't be tempted to pick up shares in Ocado- and things haven't changed much since. It is still little more than a glorified taxi service for Waitrose products; it still isn't making any money and there is only a hope that it might next year; and it is still planning on spending a fortune on a new distribution centre that will mean a very sharp increase in costs. Worse, competition is hotting up: Wm Morrison, a well-run, profit-making machine of a business, is expected to announce later this week that has its own plans for an online shopping arm.

The happy news is that sales appear to be rising fast for now up around 30% a year. But what good are sales if you can't make a margin on them? It is also worth noting that at today's price the shares don't look remotely cheap. You can't consider them on the usual measure p/e because, what with the lack of profits, there is no 'e' to use for the equation. But if you look at price to sales, you'll find that the shares are on 1.6 times. Tesco, a good solid company which is growing well and paying an excellent dividend, trades on a price to sales of 0.6 times. See what I mean?

So with all this in mind, what kind of idiot would suggest you rushed out and bought these shares? How about HSBC, UBS and Goldman? According to Goldman, Ocado shares are all set to rise 40% in the next six months, thanks to its "superior customer offering" in the face of an ongoing "structural shift towards online grocery".

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The firm might be right of course (let's face it, Goldman often is), and I don't suppose anyone expected Goldman to turn out a sell note, but flick through the report and you will probably be struck, as I was, by the vague platitudes given for the bull case and the firm tangibility of the small print risks identified at the end ("loss of key supplier relationships; increasing competition from established and new online grocers" and "operation/execution risk (for expansion plans)".

Ocado's chief executive Tim Steiner said this week that he was "disappointed" by the company's share price performance. I daresay he is. But one thing he shouldn't be disappointed by is the performance of his brokers: months after doing the work they were initially contracted for (listing the shares and being nice about the company along the way) they appear to be still happy to peddle his gloriously optimistic view of his future for him.


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