Whether this kind of performance can continue for much longer is open to debate. For me, the old arguments against investing in Ocado remain. 

Revenue up at Ocado

Don’t get me wrong – today’s headline interim numbers were good. Then again, there was no excuse for them not to be.

Ocado achieved retail revenue growth of 27.2% (to a little over £1bn) in the six months to the end of May as locked-down shoppers flooded the firm with orders. Fees from international partners relating to the construction of customer fulfilment centres (CFCs) also rose 58% to £73.7m.

Nice as all this is, ongoing investment led the company to report a pre-tax loss of £40.6m. That said, this was down from £147.4m loss reported this time last year.   

A company valued at £15bn but still to make consistent profits? This, for me, is the nub of the problem with Ocado.

Priced to perfection? 

I don’t disagree with CEO Tim Steiner that the growth in online ordering seen since the coronavirus arrived will lead to “a permanent redrawing of the landscape of the grocery industry worldwide“. My concern is that a lot of this is already priced in.

An improved balance sheet (net cash of £196m) is all well and good but Ocado’s growth rests on relentless investment and delivering on its contracts without a hitch. Let’s not forget that this is the same company whose app and website crashed back in March as it struggled to cope with demand. Factor in the switch from providing Waitrose to M&S products this September and there’s plenty that could still go wrong. 

Tellingly, Ocado’s shares are trading lower today. Some of this may be due to news of a slower-than-expected recovery in the UK economy but I think it’s also a reflection of expectations already being sky-high. 

With no change to its guidance on revenue and earnings, I’d have no hesitation in taking some money off the table if I held the shares.

A safer buy

Personally, I’d be far more likely to back life-saving technology firm Halma (LSE: HLMA). Its shares may be seriously expensive but today’s full-year results show the sort of consistency that Ocado must replicate.

Revenue and adjusted pre-tax profit jumped 11% (to £1.34bn) and 9% (to £267m) respectively in the year to the end of March. This was a record result for the 17th consecutive year. Buoyed by recent acquisitions, growth was seen in all sectors and regions in which Halma operates.

It gets better. At 16.5p per share, the total dividend is up 5%. This makes FY20 the 41st consecutive year the payout has been hiked by this percentage or more.

So, why have the shares fallen 5% today? It’s probably down to Halma stating that adjusted pre-tax profit for the new (current) financial year will likely be 5%–10% below FY2020. This is despite the company reporting “resilient” trading over Q1. Disappointing, yes, but hardly a disaster.

A global company offering life-saving equipment or a ‘jam tomorrow’ stock operating in a highly competitive sector. I know which one would keep me awake at night.

The post Ocado shares? I’d rather buy this top FTSE 100 growth stock for retirement! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

On the other, the decision by CEO Dave Lewis to stand down after five years in charge has come as a shock to the market. Lewis has been credited with turning the company around following its accountancy scandal through a combination of cutting costs, the canny acquisition of Booker, and taking the battle to discounters Aldi and Lidl through the opening of Jacks.

Given the above, I’m asking whether it makes sense to say the business could double your money in time.

Reasons to be optimistic

In contrast to other top-tier firms who’ve recently lost their leaders, the way in which Lewis’s departure has been handled so far has been exemplary. Certainty over his successor (Ken Murphy) should help stabilise the share price and potentially succeed in bringing new investors on board, even if the new CEO faces the daunting challenge of keeping operating margins as high as they’ve been.

Another reason relates to Tesco’s defensive qualities. Put simply, people will always need to eat. Should the UK economy enter a prolonged sticky patch — Brexit-induced or otherwise — it doesn’t seem fanciful to suggest that a lot of investors might gravitate towards boring old food retailers. The fact Tesco continues to be the market leader by some margin may also be enough to convince prospective buyers it’s the safest horse to back. 

And then there’s Tesco’s income credentials. Having been understandably cut by Lewis during the difficult years, dividends are back on the menu and quickly rising. This year’s mooted 8.1p per share cash return will be 41% higher than the previous year and would equate to a yield of 3.4% at the current share price. What’s more, this payout is likely to be covered just over twice by profits. 

So, why might it not happen?

A simple argument against Tesco doubling your money relates to its size. With a market capitalisation approaching £24bn, asking the FTSE 100 juggernaut’s shares to rise 100% from here might be asking too much, particularly given that competition in this industry remains so fierce. 

Yes, the aforementioned market share is appealing, but the possibility of rivals merging in the future shouldn’t be ignored simply because the Asda/Sainsbury tie-up was blocked. Should online giant Amazon step up its assault on the established firms, for example, things could suddenly become very tricky indeed.

History is also against the share price doubling. In the last 20 years, the stock has never breached the 500p mark. And, right now, I just can’t identify a catalyst that will generate such massive appreciation.

Lastly, there’s the valuation. Based on analyst expectations, the stock changes hands at 14 times earnings for FY20. That’s fairly average compared to the market in general, but it’s on the pricey side compared to its biggest rival Sainsbury’s, on a forecast price-to-earnings (P/E) ratio of 11.

In sum, I’m struggling to see how Tesco will double your money on anything but the very long term. That said, it would certainly be my preferred pick from the sector if I was looking for sustainable and growing dividends.

The post Can the Tesco share price double your money? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

From their high points on the day of the announcement on Thursday, Tesco shares had fallen 6% by the end of Friday, with Ocado shares down 7.6% — as I write, Tesco has now shed 33% since late June 2015 to 149p, while Ocado has lost 51% since its July 2015 high point to 231p.

Tesco’s big struggle is against the cut-price bricks-and-mortar supermarket chains of Lidl and Aldi, and one of its few competitive advantages is its online retailing operation. It was the first of the UK’s big supermarkets to offer the service, though it’s not always the pioneers of a new service who end up prospering from it — so online retailing is no guarantee of Tesco’s future success.

Stiff competition

As well as Ocado and the other supermarkets, Tesco is now also up against the muscle of Amazon.com (Nadaq: AMZN), which has launched a groceries delivery service in 69 London postal districts — Amazon Prime subscribers can now get their food shopping delivered, for a fee of £6.99 per month. If that’s successful, we should see further roll-outs to other major UK cities.

Amazon’s existing delivery service is already known for its effectiveness, and for its extensive use of automation to keep wages and costs down, and that’s going to make it a serious competitor for Tesco, and very possibly a contender for the number one spot in the future.

And if it’s bad news for Tesco, it’s even worse news for Ocado, which launched amid great fanfare, but whose shares, to me, have looked seriously overvalued from day one. From its launch in 2010, it took until 2014 for Ocado to turn its first profit, and even in 2015 it only recorded a pre-tax profit of £11.9m. Funding has been tight too, with net debt of £127m reported at the end of November 2015.

Massive valuation

Looking at valuation, based on this year’s forecasts Ocado shares are on a vertigo-inducing P/E  of 110. And even with a 44% rise in EPS pencilled in for 2017, that would still drop to only 76. Ocado needs 2017 forecasts to come good, and then on top of that it needs more than a five-fold rise in earnings per share to get its P/E down to around the long-term FTSE 100 average.

And now Amazon can waltz in with its masses of cash and its full delivery infrastructure already in place, and challenge Ocado’s only real competitive advantage over the tradition supermarkets — its high-technology automation and lower costs.

While Ocado shares already looked overvalued to me, they now look even more unsustainably priced. Current forecasts don’t account for the Amazon factor, and I expect them to be revised downwards in the coming weeks and months — and that would lengthen Ocado’s P/E even further, just when it desperately needs to see it shortening.

Can Ocado survive?

A competitor that probably won’t suffer from Amazon’s entry into the market is Wm Morrison Supermarkets which looks set to benefit from its partnership with Amazon and so offset the extra competition for its own offering online. But I really do see this as bad news for Tesco shareholders — and potentially devastating for Ocado.

The post Should you sell Tesco plc & Ocado Group plc and buy Amazon.com, Inc.? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Can anything save the Ocado share price?
• SpaceX vs Amazon stock: here’s where I’ve got my money
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

As is the case with most investors, it’s pretty much impossible to follow the trials and tribulations of all the constituents listed on the stock market. However, I find a watch list of shares can help me to keep my eye on companies that I like the look of, but need to do more work before hitting the buy button, or companies that I wouldn’t buy yet as I feel that the time isn’t right, or we’re currently in the wrong part of the cycle.

Mixed fortunes

Two of the shares currently on my watch list are under-pressure Switzerland-based natural resource company Glencore (LSE: GLEN) and Greggs (LSE: GRG), the UK-based bakery and food-to-go retailer.

As can be seen from the chart below, there has been a clear divergence of the share prices as Greggs has outperformed the market while Glencore has been one of the worst places for your hard-earned cash over the last 12 months.

However, it’s possible that investors could have avoided at least a proportion of Glencore’s falls by taking some time to look at the world around them, or more to the point, the sliding price of commodities. To my mind it stands to reason that falling prices are always going to impact on the bottom line and cause pressure on a leveraged balance sheet.

Now for something completely different

On the flip side, investors in Greggs have been rewarded with outperformance. This came as the company continued to focus on the growing food-to-go market, which includes new products like the heat to eat sandwich and healthier options such as the balanced choice range.

Initiatives such as these translated into total sales growth of 5.2% and like-for-like sales growth of 4.7%.

Despite this growth, it would appear that the job isn’t yet finished. Management intends to continue its focus on improving systems to simplify processes, improving efficiencies and plans to invest £100m in manufacturing and distribution operations over the next five years.

Net cash vs net debt

Some readers will remember the market’s reaction to Glencore’s debt position last year, which sent the shares down to new lows at the time. To be fair to management it has been taking action on this with asset sales, capex reductions, cost savings and passing on the final dividend bringing net debt down to $25.9bn. However, that’s still more than the market capitalisation of the company!

Conversely Greggs, following a review of its cash, decided to maintain a net cash position. Despite this, the group paid its first special dividend of 20p per share (a total of £20.2m), in addition to ordinary dividends paid in the year totalling 23.4p per share.

Management also raised the final dividend by 32.5% to 21.2p per share – that signals confidence in the underlying business to me.

Will You Grow Richer In 2016?

The post Why I’d Buy Greggs plc (+15%) And Sell Glencore plc (-2%) appeared first on The Twelfth Magpie.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Because that really is the problem. The big UK supermarkets kept expanding their operations and growing their margins, with Tesco in particular trying its hand at banking, insurance, car dealership, and international expansion. And they grew complacent in their increasingly affluent niches without noticing that the old and ignored “pile it high and sell it cheap” market segment was just sitting there waiting to be exploited, the way Tesco and Morrison had done in their long-forgotten pasts.

So now, while Tesco and Morrison have been closing stores to try to shed some of their cost overheads, and Morrison has offloaded its chain of convenience stores, Aldi is starting from a much leaner cost base and is doing exactly the opposite with its plans to open 80 new UK stores this year and create 5,000 new jobs. The net result will be 700 Aldi stores across the country, employing 32,000 people.

A big shift

Thomas Kuhn famously wrote of the “paradigm shift” that happens when a scientific advance overturns current understanding or assumptions, and the recession we have just endured has done something similar to the retail environment. While at one time we were all happy shopping at Tesco, Morrison and the rest, and looking askance at that funny Aldi with its shelves full of strangely-labelled foreign tins (“Ooh, Pumpelsqueezl, how nice“), millions of us have since taken a much closer look and we’ve seen equal quality (and often superior) goods at lower prices.

Do Tesco And Morrison have to go back to day zero and start all over again from the ground upwards? Well, no, and they couldn’t anyway. There is still a very large market segment for the approach that Tesco in particular takes, with its focus on various ranges of goods at different prices and perceived qualities — I’m always surprised at the popularity of expensive “Finest” ranges of packaged food products.

But they, and all the rest, have no option but to accept the shift to a focus on cut-throat margins and intense price competition, and I can see price deflation hurting their bottom lines for some time to come.

Still too expensive

After years of collapsing earnings, Tesco is forecast to finally rebound in 2017. But its shares would still be on a stretching P/E of over 19 based on today’s 178p share price, with dividends yielding only 1%. And at Morrison we’re looking at a forecast 2017 P/E of 16 on a share price of 177p, although with dividends at 3.1% (which I think is a mistake — we should have had a cut in 2015).

I wouldn’t be buying either of these now — with there being so many better bargains out there, why take your chances in such a highly competitive sector? It will be enlightening to look at the UK supermarket sector in, say, another five years. Will there still be room for all of the competitors or will we see any takeovers? I wouldn’t be surprised by the latter, and I see Morrison as perhaps the most vulnerable.

The post Will Aldi Really Kill Tesco PLC And WM Morrison Supermarkets PLC? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.