Ocado optimism on Amazon is not very catching

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By :  ,  Financial Analyst

The right side of the retail divide

Ocado’s half-year core earnings have come in comfortably above forecast, and that should keep it on the right side of a wave of investor wariness on Britain’s retail industry due to rising inflation and stagnant wage growth. Ocado’s shares are among just 13 out of the 50-odd retail stocks tracked by City Index to have risen by more than 10% so far this year, with 21 still in the red.

This stock has often had a speculative premium, and shades of such thinking have been evident again of late, particularly following Amazon’s deal to purchase Wholefoods. At least some of Ocado’s around 11% rise YTD though can be linked to its recent run of more than fair core earnings growth. And the 2.7% rise in EBITDA it reported this morning will back that, given that the result keeps the group on track to meet consensus expectations for the year of least £97m, and perhaps the symbolic milestone of £100m.

Sufficient worries do remain however—which partly explains the stock’s indecisive reaction to its results on Wednesday. It may that investors are beginning to look past a persistent decline of basket size—falling again, by 1.4% in H1—attributing it to market structural and competitive factors as larger grocers establish themselves online and newer upstarts encroach. Much of the concern will continue to be at least partly neutralised whilst active customers keep growing, as with the first half’s 12.7% rise to 600,000. With much up in the air for Ocado though, ambiguous key metrics are less than ideal.

Investor divide sets in

It will be more difficult to balance the stock market’s curious division over Ocado. Its business seems to be one that investors either love or almost hate. That’s reflected in the group being the second most-shorted stock on the London Stock Exchange right now. And that’s in an environment which is generally cautious about all of Britain’s large retailers.

Again, investor impatience with halting progress on profitability—down 9.4% over the half-year—may be limited by the extent to which Ocado eventually comes good on the glittering promises it has tantalised shareholders with over the years. Recent events may have brought an inflection point closer. CEO Tim Steiner describes Amazon’s deal to buy Wholefoods—Amazon’s most significant foray into in-store grocery retail yet— as “positive” for Ocado. It’s an admirably positive attitude. But Steiner has more convincing to do.

True, the pick-up of interest from U.S. retailers is promising for potential further technology licensing deals. But scepticism is partly based on the fact that Amazon’s intention to scale-up a dual channel strategy was widely known when Ocado first partnered with Morrisons in 2013. And the intent was certainly there during the two and half year delay between Ocado’s announcement that it would sign a further technology deal, and the as yet ill-defined agreement with an unnamed European group last month.

The group says its mysterious new deal will be the “first of many”. Above-sector average progress on revenues and underlying earnings has probably bought Ocado more time with investors to demonstrate the claim. But it’s not immune to retail industry challenges.

  • Ocado’s technical price chart continues to reflect the limits of its investors’ tolerance even if whilst they display their underlying support
  • On the positive the shares have escaped the grinding slope lower from a channel trend between September and April
  • Less positively, a similar price cap to the one that ended the group’s clearest uptrend last year (326p)—June-September 2016 has brought the most recognisable recent one—early April-early June to an end as well (340p)
  • Whilst, in a sense progress is evidently being made in sentiment, the consequent reversal from highs of the year so far appear almost ‘fractal’ with the reversal off last year’s lower high fort the year
  • Since the most recent failure, lower highs and lower lows have been seen, albeit the price has confirmed a potential support at  286p, a former resistance that kick-started the September and April downtrend
  • With Wednesday’s share price reaction having broken its 21-day exponential moving average, a relatively short-term gauge of sentiment, it’s touch and go whether support will hold, though a sustained loss of the 21-DEMA threshold would tend to confirm the negative view
  • The message from the momentum gauge, Relative Strength Index, is however, negative at the moment: check out the RSI’s consistent downtrend
  • Successful retention of 286p support would be the best bit of good news for the share since its failure on 5th June
Related tags: UK

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