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Ocado shares climb 5% after full year figures reassure investors

After December’s warning and executive changes, company reports near 17% rise in full year sales

After a profit warning in December and the recent announcement its finance director was leaving, final figures from Ocado have come as something of a relief.

The online grocer – which mainly sells products supplied by Waitrose – has come under pressure on fears of growing competition and worries about its troubled distribution system. But its results showed full year sales up 16.6% and a pretax loss of £2.4m, down from £12.2m. It said sales growth in the first quarter would be around 10%, in line with the final quarter of the 2011.

The company also dismissed bid speculation – rumours of interest from the likes of Morrisons or Marks & Spencer periodically do the rounds in the market. Analyst Amy Crofton at Barclays Capital said:

The potential for any big shocks in today’s results was limited given we effectively knew sales growth and earnings already. Longer term, we still like Ocado. The capacity improvement works will allow much stronger growth towards the end of the year just as the comparisons start to get easier, but at the start of the year we find it difficult to see why the shares will rerate much further from here.

The recent departure of the chief financial officer suggests any bid for the stock is not imminent, as some may have hoped. Also, while the Christmas trading statement did show a strong figure for four weeks in December this was because Ocado pulled out its capacity improvement works, and faced a particularly easy comparison because of the snow last year. The 30% rise in the share price that day suggests the market chose to ignore the downgrade to sales growth guidance for the first quarter overall. We think there could therefore potentially be some disappointment when the first quarter figures are released in March.

Jonathan Pritchard at Oriel Securities repeated his sell recommendation:

The profit numbers were well flagged but the guidance for first quarter sales is disappointing and the risk remains on the downside to forecasts.

Current trading must be patchy. Ocado did well in December (sales up 16%) but the implication from the company’s first quarter target of 10% sales growth implies that at present, sales growth is mid single digit. That’s the lowest it’s ever been. The risk is on the downside to forecasts so the likelihood is that Ocado will not turn a pretax profit this year.

Offers from the other food retailers, such as Tesco’s 10p off per litre if you spend £60 are very bad news for Ocado (they can’t respond).

There is plenty of the usual rhetoric about Ocado’s potential but we have learned to take them with a pinch of salt.

The shares are on a huge valuation but are a major sell after the strong run. Bid hopes are highly optimistic. The shares are of little interest to us.

Another bear of the stock, Clive Black at Shore Capital said:

Ocado has not demonstrated to the market that it has an operating model that can work for customers whilst building margins and returns to a satisfactory level. Furthermore, the ongoing issues at [the distribution centre at] Hatfield and the hangover that is likely to weigh on metrics once the second centre opens makes for no near-term respite.

It is not clear to our minds that Ocado can stay within present lending arrangements whilst seeing through its plans and, as such, we cannot rule out the need for further capital from its investors. For us to change our view on the stock requires structural upgrades and delivery on prior rhetoric as to industry leading return on sales and return on capital employed. Sell.

Still, for the moment, investors have reacted positively, and the company’s shares have climbed 4.1p to 84.3p, up around 5%. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds