Ocado Group plc

Revenues have been growing at Ocado at a pretty good rate, but is only now forecast to make a profit this year in FY2014. With a market cap of around £3,500m, the forecast earnings translate to a PE of around 186. With revenues forecast to increase over 17% next year and earnings to more than double, it would still have a forecast PE of 92 based on these numbers and current market cap. Looking at the balance sheet, it has £498m in assets and £295m in liabilities, which gives us net assets of about £200m. It is an online retailer but with the current market cap, it is valued at over 17 times its net assets.

These valuation metrics would suggest the stock is clearly overvalued on a fundamental basis and the only way these metrics can fall into line is for the share price to fall. Just as a comparison, Morrisons is valued at £5,500m and is on a PE of around 10 with net assets around £5,200m. Sainsburys is valued at around £6,500m and is on a PE of around 11 with net assets around £5,700m. If Ocado had a similar valuation, its market cap would be between £200m-£250m which equates to a share price of around 35p-40p. Perhaps because it is an online retailer and has first mover advantage, then it demands a premium on its fundamental valuation but with the numbers stated above, it looks highly overvalued.

Our analysis shows weak technicals and a disparity in fundamentals vs market value. Coupled with a confirmed negative bias in sentiment/momentum, on this basis we see a strong bear case to short sell the stock.

Ocado Group Fundamentals

Ocado Group Forecasts

• 7^th Feb 2014, Deutsche Bank, Sell, target price 440p

• 5^th Feb 2014, HSBC, Underweight, target price 230p

• 5^th Feb 2014, Exane BNP, Underperform, target price 340p