The Ocado (LSE: OCDO) share price is down heavily today. That’s despite the company reporting what appears to be a fairly robust set of full-year numbers. What’s going on?

Revenue up

Let’s focus on the good stuff first.

At £2.5bn, revenue for the 12 months to 28 November was 7.2% higher than the previous year. As one might expect, the vast majority of this came from retail sales via its joint venture with Marks & Spencer. One thing that’s particularly worth highlighting here is that sales were also 41.5% higher compared to pre-pandemic levels. This, if anything, goes some way to endorsing CEO Tim Steiner’s belief that online grocery demand is “here to stay”.

Away from its retail arm, Ocado opened five of its high-tech Customer Fulfilment Centres (CFCs) over the period. Seen by many investors as the reason to own the stock, two of these were located in the US. This, in turn, helped revenue from its international solutions arm soar over 300% to £66.6m. A total of 13 sites are now up and running around the world.

What’s got investors so frustrated?

Unfortunately, the company hasn’t been immune to worker shortages. A lack of HGV drivers served as a growth headwind in the second half of the year. A fire at its Kent distribution centre last July also reduced capacity. 

Collectively, these factors — combined with the ongoing costs of developing its tech — may go some way to explaining why the Ocado is out of favour again today.

Ocado share price: opportunity or warning?

Taking into account today’s significant fall, the Ocado share price has now tumbled 23% in 2022 alone. The performance over the last 12 months is even more depressing for loyal holders. No less than 56% has been wiped off the company’s value.

As someone focused on growing wealth over the long term, should I see this as an opportunity to build a position?

Looking at the positives, it’s clear that Ocado’s tech is in demand with a total of nine CFCs due to open in 2022. Assuming the company really can help partners “go-live quicker, at lower cost and achieve higher margins and returns on capital“, I can only see this annual number rising in future years.

The company is also proving increasingly popular with shoppers. Customer numbers rose 22% over the last financial year and orders rose nearly 12% to 357,000. 

On the flip side, a £9bn valuation remains lofty considering this company made a loss of £177m in 2021 due to increased investment. And even if Ocado made all the right moves from here, there’s a possibility that shareholders could see the value of their holdings fall further in 2022 as the market grows increasingly averse to ‘jam tomorrow’ companies.

A safer bet?

The awful performance of the Ocado share price in the last year is further evidence that no investment is risk-free. It also highlights that sentiment towards even the biggest UK companies can quickly reverse.

Personally, I’m in no hurry to buy this beaten-down stock today. In fact, I’d be more inclined to buy a slice of market-leader Tesco.

While lacking Ocado’s technical know-how and growth prospects, its forecast £60bn revenue is 24 times that of its FTSE 100 peer. It has its own risks, but may also be regarded as a better option for coping with inflationary times due to its pricing clout and 3.7% dividend. 

The post What’s going on with the Ocado share price? 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 Ocado Group and 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.

The interest in Morrisons led to its share price rocketing. It was purchased by CD&R for just under £10bn, including debt. This equated to a 287p per share offer, over 60% higher than the pre-acquisition announcement price.

M&S (LSE: MKS) has proved itself as one of the hottest FTSE 100 stocks this year, delivering over 80% year-to-date returns. In mid-August, on the Morrisons news, the M&S share price jumped over 25% as investors saw it as another potential target. If this did occur, I think we could see the share price of the FTSE 100 stock explode.

Acquisition case for M&S

In my opinion, there are three key factors that highlight M&S as an attractive investment opportunity for a private equity firm.

The first is strong cash flows. The PE model rests on using large amounts of debt to fund an acquisition (called a leveraged buyout). The aim is to pay down this debt using the cash flows produced from the acquired company, building the PE firm’s equity stake in the company. The company can later be sold and the difference in starting and ending equity value is the return on investment. In order for this model to work, the company needs strong, stable cash flows. M&S has just that, delivering £296m cash in 2021.

Them there’s its large property value. One thing that’s particularly attractive about M&S and many retail grocery firms is the large amounts of property they hold. For example, at present, M&S has an estimated £1.8bn worth of property. This is attractive for PE firms because this property can be sold to help fund transaction costs.

The low-interest-rate environment is a broader factor that makes PE investment very attractive. This makes raising capital and sustaining debts very cheap. This is critical for PE firms as their whole acquisition model relies on using large amounts of debt.

Potential risks

Although the above factors highlight the attractiveness of M&S shares, there are still risks that must be considered if I were to consider a purchase. One such risk is the fact that although current interest rates are very low, many investors are expecting them to rise very soon to combat rising inflation. If this is the case, then it will make it harder to raise capital and PE investment will be less attractive.

M&S has already increased its online delivery presence through its 50% stake in Ocado. The pandemic has vastly accelerated the shift to online grocery shopping. While this is encouraging, it also means that M&S will have to compete with a much wider range of grocery delivery firms moving forward. It will have to successfully navigate this competitive landscape if it wants to carry on delivering good results. 

I think M&S is one of the most attractive FTSE 100 stocks for a PE acquisition that could drive a steep share price rise. But acquisition talk aside, I think M&S’s strong results and online presence could make it a great investment opportunity for my portfolio as an independent company. Those features that make it attractive to PE firms, make it attractive to me too!

The post Could this FTSE 100 stock explode in 2022? appeared first on The Twelfth Magpie.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

“Exceptionally strong” sales

With most of us stuck indoors, it’s unsurprising that Tesco reported that it had seen “exceptionally strong” sales in the year to the end of February. 

Group sales (excluding fuel) rose 7.1% to £53.4bn. No less than £48.8bn of this came from the UK (up 8.8%) with the remainder coming from operations in Europe and Tesco Bank. Predictably, online sales rocketed over the trading period — up 77% to £6.3bn.

Unfortunately, all this didn’t translate to the bottomline. On a statutory basis, pre-tax profit tumbled by almost 20% to £825m thanks to massive coronavirus-related costs. The move to repay the Government £585m in business rates relief also had an impact. Although not unexpected, this may help explain today’s reaction.

Tesco’s decision to maintain rather than increase the amount of cash it returns to investors, although prudent in my book, may have also annoyed some. Today’s final dividend of 5.95p per share brings the total payout for the year to 9.15p per share (ignoring the special dividend paid in February). Taking into account the Tesco share price as I type, this gives a yield of 4.1%. That’s still more than I could get from the FTSE 100 as a whole (3.1%).

Still a ‘buy’ for me

Of all the listed supermarkets, Tesco has been my firm favourite for a while. Today’s share price reaction won’t change that.

At 27.1% (and despite the rise of the German discounters), the company still has a commanding share of the UK grocery market. In fact, Tesco commented today that it had actually increased its dominance over the last year and gained customers “from all key competitors“.  Factor in its incredibly popular Clubcard scheme and I don’t see Tesco losing its crown anytime soon. 

Another reason for being bullish on the Tesco share price is the company’s outlook. While sales may moderate this year, the £18bn cap does expect “a strong recovery in profitability” as costs relating to the pandemic won’t repeat in FY22. In fact, Tesco now believes retail operating profit might be similar to that seen in 2019/20 financial year.

Reasons to be wary

Of course, this isn’t to say there’s nothing to be wary of. For one, the online part of the business is still loss-making. I don’t see this situation changing radically for a while. Prospective buyers like me also need to be comfortable with the possibility of a third Covid-19 wave and the knock-on effect this could have for Booker, Tesco’s wholesale, hospitality-focused division.

On top of this, the performance of the Tesco share price has been nowhere near as good as other companies in the index, even if we take into account the 15-for-19 share consolidation in February. The FTSE 100 itself is up 19% in one year. Based on this, it may have been less stressful to buy a diversified FTSE 100 tracker and do nothing. 

Yet I continue to regard Tesco as a good option for FTSE 100-focused, defensive-minded investors like me. A valuation of 11 times forecast earnings looks reasonable, even if a full share price recovery will take time. I regard today’s fall as an opportunity and would be happy to buy. 

The post The Tesco share price is falling. Here’s why I’d buy 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.

Unfortunately, this hasn’t been reflected in the performance of the Tesco share price to date. I think this is set to change over the rest of 2021.

Tesco share price: opportunity knocks

Based on current analyst projections, Tesco trades on 11 times forecast FY22 earnings. This makes it the cheapest of the listed supermarkets to acquire. I think that’s very attractive considering Tesco remains the clear market leader in the UK. Despite the huge growth achieved by German discounters Aldi and Lidl over the last few years, Tesco still commands 27% of the market. Sainsbury, in second place, has just over 15%.

The reason for this low valuation relates to the huge jump in profits expected once the coronavirus storm has passed. These have been held back as a result of the additional costs the retailer has faced from needing to adapt its stores and delivery service in response to Covid-19. This helps to explain why the FTSE 100 index is up almost 30% since last March’s market crash but the Tesco share price is down almost 20%.

Even if a recovery takes time, Tesco looks like a great stock for income seekers. Analysts have the company returning 10.7p per share in the current financial year. That becomes a yield of 4.7%, based on the Tesco share price as I type. This goes some way to compensating for the fact that holding individual company stocks involves more risk than buying a fund tracking an index. For comparison, The FTSE 100 currently yields a little under 3.2%.

In addition to the bigger payout, Tesco’s dividends look set to be covered almost twice by profits. In other words, it’s very unlikely to be cut, or not paid, at least as things stand.

Tech threat

As bullish as I am on Tesco, this doesn’t mean there won’t be some turbulence ahead. For one, the coronavirus pandemic could conceivably continue to hold back profits if (and that’s a big ‘if’) the UK experiences a third wave like some European countries. 

Another potentially more long-lasting threat is the possibility that e-commerce giant Amazon may acquire one of Tesco’s rivals (Morrisons seems the most likely candidate) and/or dramatically grow its presence on UK high streets.

As things stand, the latter looks more probable. In the last month, the US company has opened two Amazon Fresh branded stores in London. Instead of using self-service tills or queuing up, customers open an app on their phones on arrival. The app then records what they take out of the store and bills the person accordingly.

Now, whether this innovation is sufficient to worry Tesco is hard to say. In time, the company could end up introducing similar technology to its own stores. Nonetheless, I do think it’s worth bearing in mind before clicking the ‘buy’ button.

Tesco remains the go-to option in this sector, in my opinion. It may not boast the pulse-quickening excitement of a stock like Ocado but I think it’s a far better pick for more defensive-minded, get-rich-slowly investors like me.

The post The Tesco share price looks great value to me 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 Ocado Group and 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.

Is my long-held suspicion that the shares are overbought finally ringing true, or is this a mere short-term blip?

Ocado sales soar

This morning’s numbers relate to Ocado’s retail arm — the joint venture it formed with battered former FTSE 100 member Marks & Spencer back in February 2019.

Thanks in part to another lockdown, retail revenue soared 35% over the 13 weeks to 29 November to just under £580m. According to the company, this compares favourably to the normal peaks and troughs experienced before the coronavirus arrived. It also suggests customers have been receptive to the firm’s switch in trading partners, to M&S from Waitrose in September.

Ocado received an average of 360,000 order per week over the period — up 3% from Q4 2019. Despite the additional demand, it was able to achieve “high rates of on-time customer delivery and low rates of substitutions,” according to Retail CEO Melanie Smith. The average order size was £133 — evidence, Ocado believes, that shoppers’ behaviour was continuing to “normalise.“

Priced in?

It seems fair to say Ocado shares have been one of the better FTSE 100 buys in 2020. Those placing the stock in their shopping basket at the beginning of January would be sitting on a gain of around 75%. That’s after taking today’s fall into account! The question is, how much of this good news is now priced in?

Based on this morning’s reaction. I’d say quite a lot, especially as the company raised earnings guidance again today. It now expects full-year earnings to be “over £70m” compared to its previous prediction of over £60m. And yet traders weren’t impressed!

Part of this may be explained by the fuzzy outlook. Within today’s statement, Ocado said sales and earnings growth in the next financial year will depend on how quickly trading normalises. It’s also dependent on when three new warehouses become operational. These are expected to add 40% more capacity to the business.

Market minnow

But is this reaction really that surprising? After all, Ocado is still trading at a loss, due to the huge investment it’s needed to make over the years. As impressive as its operations are, the FTSE 100 company is already valued at over £17bn. That’s the sort of staggering valuation we’d expect from flash (overhyped) US tech stock. Sure, Ocado might utilise market-leading software, but no share is worth buying at any price. 

On top of this, it’s worth remembering Ocado doesn’t operate in a vacuum and the grocery market remains as cut-throat as ever. Depending on how the UK economy fares in 2021, it’s possible more people will switch away from M&S to cheaper options out of necessity.  

It’s not as if Ocado has a commanding presence either. In November, it had just a 1.7% share of the UK market, according to Kantar. FTSE 100 peer Tesco, on the other hand, had 27%. Its valuation is £22bn — only £5bn more than Ocado. 

Considering the above, I’m still giving Ocado shares a wide berth as an investor. For me, there are far better opportunities elsewhere in the market. The bubble may finally be bursting.

The post Ocado shares are falling today. Is this FTSE 100 firm’s bubble finally bursting? 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 no position in any of the shares mentioned. 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.

Can the company continue this positive momentum and help new investors grow their wealth? Despite being proven wrong in the past, I’m still to be convinced.

“Unprecedented demand”

The grocery sector has, of course, been one of the few to thrive during this pandemic. It comes as no surprise then that Ocado announced today it had experienced “unprecedented demand” over recent weeks and that it was now delivering “significantly more groceries to households than ever before.” 

Without doubt, today’s numbers were excellent. Revenue growth in its retail arm in Q2-to-date was a little over 40% higher on the previous year. It was also almost 30% higher than in Q1.

Although sensing that normal shopping habits had returned, the growth stock said the number of items in customers’ baskets was still high. That said, it did caution investors that the near-term outlook remained cloudy. Since no one knows how long it will take for life to return to normal, management chose to suspend its guidance on retail revenue for the current financial year. 

Growth stock

Of course, Ocado is more than just an online supermarket. It’s Solutions arm is the reason many investors hold the growth stock. Through its Smart Platform, the company is able to offer infrastructure and software solutions to grocery firms around the world. Giants such as Kroger and Coles Supermarkets are already on board. So too is the UK’s fourth-biggest supermarket Morrisons. 

On this front, there was more good news. Despite the pandemic, the company reported delivering its first international customer fulfillment centres (CFCs) to French firm Groupe Casino and Canadian retailer Sobeys on time. It added that it was not experiencing any material delays in terms of delivering further facilities to other customers.  

So, was I wrong about Ocado?

I have no hesitation in holding my hand up and declaring that — purely from a share price perspective — my call on Ocado was wrong. It’s done very well for investors and I’m not one of them.

So, has my opinion on the company changed? Not really. 

From a valuation perspective, Ocado still looks faintly ridiculous. Yes, it has market-leading technology (although it’s worth noting that its website couldn’t cope with demand in March). Yes, it has £1.2bn of cash on its balance sheet. And, yes, online grocery retailing is the future. But, with a market-cap approaching £12bn, how much of this is priced in? I’d say a lot (and then some).

Aside from the fact it’s still to make a profit, Ocado must also contend with the possibility that a free-falling global economy will have an impact on how much people are able/willing to spend on groceries going forward. In this scenario, it’s surely the German discounters Aldi and Lidl that will benefit, not new joint venture partner Marks & Spencer. 

As positive as today’s update was, I certainly wouldn’t want to be caught owning the shares if everything didn’t proceed perfectly. And, as we know, it pays to expect the unexpected when investing, particularly in 2020.

Good luck to all new holders. But I think there are less risky ways to make money in the FTSE 100 right now.

The post Can FTSE 100 growth stock Ocado still make you rich? 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 no position in any of the shares mentioned. 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.

The Tesco (LSE: TSCO) share price has risen about 10% over the last month. This sounds impressive. However, the FTSE 100 index has jumped 9.9% over the same period. So, when put into context with the footsie, the supermarket’s shares no longer appear to be market-beating.

Looking further back over five years, it appears that the only time Tesco shares have outperformed the FTSE 100 is through the recent coronavirus period. This is no surprise. During this period, many companies have had to stop operating but our need for food doesn’t go away. So, it’s likely all grocers will benefit, at least in the short term.

But is Tesco worth buying for the longer term?

Tesco share price leaps 4% on dividend 

Of Tesco’s recent 10% price jump, 4% was due to news that the grocer will reward its shareholders by paying a dividend. Currently yielding around 2.91%, it’s attractive for some but almost half that of rival Sainsbury, now at 5.33%.  

The news of the dividend raised some eyebrows. Tesco has generated pre-tax profits of £1.3bn over the 12 month period leading up to February 2020. But CEO Dave Lewis defended the decision by highlighting the chain’s need for capital to finance hiring new staff and its growing supply and distribution activities.

Indeed, Tesco may have to pay an estimated £925m to keep customers happy. Such large amounts may begin to undermine recent share price performance in the long run. The next two months’ revenue figures could help to show whether Tesco’s March boom is sustainable. 

Tesco is said to be a leader in its field. Moreover, it’s had a good recovery under its new CEO since the accounting scandals and profit warnings of 2014. The company has made a name for itself with online shopping and has a well-established platform. However, its competitors are catching up and I’m struggling to see how the grocer will maintain its leading position. 

Morrisons is growing its market share 

One such rival is FTSE 100 grocer Morrisons (LSE: MRW).

Morrisons is very much the smallest of the big four grocers. Its share price has been disappointing but there are many reasons to be optimistic about the future. 

For starters, Morrisons is expanding. Recent agreements with McColls and Amazon are generating new customers. This is giving more competition to the bigger grocery chains, and in particular, Tesco Metro and Sainsburys Local. Amazon Prime customers can now stock up on Morrisons groceries for same-day delivery. I don’t think any other online food retailer offers this service.  

Morrisons profit margins are similar to its peers. However, some analysts believe the smaller supermarket to have a more efficient cost structure. This bodes well for the future as coronavirus-induced pressures on logistics will be expensive. It will also help having a stronger balance sheet and no notable pension deficit to fund.

At 3.69%, Morrison’s dividend yield is better than Tesco. The company has a history of well covered and growing dividends, making it attractive for income investors. And some analysts expect Morrisons business model to take off, growing its share price. This makes it a good choice for value investors too.    

As the FTSE 100 recovers from the stock market crash, it may leave the Tesco share price behind. But I think Morrisons is better placed to go with it.

The post Has the Tesco share price beaten the stock market crash? appeared first on The Twelfth Magpie.

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Rachael FitzGerald-Finch holds shares in Morrisons. 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.

Margin growth

Tesco’s margin growth has much to do with the improving sentiment towards its shares. Last year, the group operating profit margin rose to 2.9% from 2.3% a year earlier, marking its third successive annual increase and putting the company on track to meet its 3.5-4% target by 2019/20.

Some analysts reckon that the company could meet its margin target even sooner and that its current goal isn’t ambitious enough. As pricing pressures ease and like-for-like sales grow, fundamentals in the sector are improving.

Still, I’m sure that many investors are nervous as the German discounters Aldi and Lidl continue to gain share in the UK grocery market. They’re planning hundreds of new store openings over the next few years at a time when the Big Four players have slammed the brakes on their own expansion plans.

Discount valuation

But shares in Tesco also trade at a discount to its smaller rival Morrisons (LSE: MRW). At the time of writing, Tesco trades at a forward price-to-earnings ratio of 17.1, while Morrisons is valued at 19 times its expected earnings this year.

I reckon this valuation gap seems unwarranted given Tesco’s improving financial performance and potential synergy benefits from its acquisition of wholesaler Booker. Cost synergies are expected to generate savings of £60m in the first year, and at least £200m annually three years on from the deal, which would add significantly to its bottom line.

A re-rating of its shares could come about from an increase in shareholder payouts. Its balance sheet is in a much better shape now, after net debt fell by nearly 30% to £2.63bn over the past year. And with growing free cash flow, this could mean an increase in its full-year dividend or a share buyback could be on the cards in the near term.

Morrisons

Morrisons also has a few catalysts of its own. The smaller rival is expanding in the wholesale supply business following a new supply agreement with SandpiperCl, and is seeking to lower its costs via investments in existing stores and infrastructure. It is already realising efficiencies in automated ordering and in-store administration, and this is beginning to show up in its margins.

Free cash flow in the year to 4 February 2018 dipped to £350m, from £670m last year, but the company still afforded a special dividend of 4p, which raised total dividends for the year up 85.8% to 10.09p. At its current share price of 235p, this gives it a combined yield of 4.3% for the year.

What’s more, City analysts are warming up to its shares. Out of 18 analysts covering the stock, four have ‘strong buy’ recommendations on Morrisons, up from just two three months ago.

The post Tesco’s share price may see more upside this year appeared first on The Twelfth Magpie.

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• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
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Jack Tang 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.

Inflation

To some extent, growing wage costs are to be expected. Although wage growth in the UK has been sluggish in recent years, inflation has been growing at a steady pace and rival supermarkets have announced similar pay rises. As such, Tesco needs to do more to attract (and keep) the talent it needs to stay competitive. And what’s more, despite the proposed pay increases, its staff will still be paid less that those at Aldi and Lidl, its two German low-cost (but higher-pay) rivals.

Nevertheless, wages are one of the largest single expenses for Tesco, with the total employee pay bill totalling £7.4bn last year. That’s equivalent to almost six times the group’s annual operating profit, which means even a modest increase in pay would be a serious drag on margins and profits.

Margins

By 2019/20, Tesco expects to deliver group operating margins of 3.5% to 4%. That’s almost double today’s margin of around 2%, but still significantly below the 6.5% it enjoyed in its glory days.

To lift its margins, the company has undertaken big steps to simplify its product range and improve its store operating model to increase customer satisfaction while also cutting costs. The supermarket giant has conducted a thorough review of its entire cost base and has plans to remove another £1.5bn from its annual operating cost base. But is the company still on track to meet its ambitious profit targets?

I reckon it’s too early to say as the group has recently shown some mixed results. Although it reported its strongest quarterly like-for-like sales growth in the UK, international sales have weakened dramatically. In addition, City analysts are divided over whether Tesco can keep a lid on costs as inflation rises and as real household incomes come under pressure.

Capita

Tesco is not the only company looking to turn its profits around. Outsourcing outfit Capita (LSE: CPI) is similarly looking to bounce back from tough times.

The company announced a series of profit warnings last year as clients delayed making big investment decisions amid the Brexit uncertainty. As a result, underlying pre-tax profits for 2016 fell by 19% to £589m.

Lately though, things appear to be turning a corner as the business process manager is seeing activity in the private sector return to good levels and has secured multiple contract wins. 

Capita’s balance sheet is also set improve as it recently announced the sale of its asset management services arm to Australian firm Link Administration Holdings, which would net the outsourcing firm £888m. This would help to ease its debt position, which currently stands at just over £1.7bn.

As such, I have more confidence that Capita will be able to maintain its dividends at current levels. And although its shares have recovered in value by 34% since the start of the year, I reckon they still represent reasonable value, with Capita trading at just 13.5 times expected earnings this year and yielding 4.6%.

The post Is Tesco plc on track to meet its ambitious profit targets? 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?
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Jack Tang has a position in Capita plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

For one, the deal adds extra competition to an already crowded sector that Ocado can’t afford. The entry of Amazon, a deep-pocketed competitor willing to sacrifice margins for volume, signals further price cuts in the market to attract customers. For Ocado, whose operating margins in H1 were a paltry 2.1%, there isn’t much room to attract customers by cutting prices while also investing heavily in expansion efforts.

Competition from Amazon will also be particularly difficult for Ocado because the two companies target the same relatively wealthy customer base. Ocado’s average customer spends roughly £110 per shop, and there’s likely to be significant overlap between these shoppers and those who dish out £79 a year for Amazon Prime. The tie-up between Morrisons and Amazon Prime will also begin rolling out in London and Hertfordshire, Ocado’s geographic heartland.

The end of Ocado?

Is this an immediate deathblow for Ocado? No. The company is still consistently growing sales in double-digits and it has strong competitive advantages in its distribution network and logistics knowledge. But the problem is that these are the same strengths that Amazon is famous for. If Amazon follows its traditional game plan of ignoring margins in order to bring in new customers, Ocado’s relatively weak balance sheet and small size will prove little challenge for the American giant.

What hope does that leave for Ocado? Well, the company desperately needs to land a long-promised contract with an international grocer. Putting its logistics knowhow, tech platform and distribution-related intellectual property to good use overseas in order to escape price wars and low margins at home could be a means of reversing the downward spiral share prices are stuck in. Otherwise, we could be looking at a buyout as Ocado’s best hope of rewarding shareholders.

For Morrisons this deal is a net positive as it expands on the company’s strength in wholesale foods and broadens its geographic reach into areas of the country where it has little presence. It also nicely complements the current turnaround programme that’s focusing on closing non-performing stores and refitting the entire estate by 2018.

This plan drove overall revenue down 1.2% year-on-year in Q3 due to fewer stores but like-for-like sales at retained locations improved a healthy 1.6%. This means the additional sales from the Amazon deal will be very welcome as a way to balance out lower revenue from fewer locations.

Now, this doesn’t mean Morrisons has escaped the increased competition and subsequent price wars that have battered the industry. H1 operating margins remained low at 2.7% and net debt, which is expected to be £1.2bn at year-end, is still worryingly high. The deal with Amazon will be a boost to sales, but price deflation and continued competition from discounters will be constant headwinds going forward for Morrisons.

The post Is Morrisons’ Amazon deal a death blow to Ocado Group plc? appeared first on The Twelfth Magpie.

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Ian Pierce 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.