Morningstar analysts have reacted to yesterday’s Ocado results with a fair value estimate suggesting Ocado is worth three times the current share price.
Yesterday, Ocado reported a reassuring increase in revenue and a very encouraging increase in EBITDA guidance for the year. After many periods of disappointing updates, Ocado finally produced respectable increases in revenue, demonstrating progress in the rollout of its technology business and higher engagement with premium food delivery in conjunction with M&S.
Shares spiked higher early in the session after results were released, but the gains diminished with short-term traders banking profits as the session progressed.
However, those with longer time frames, such as the equity analysts at Morningstar, see the potential for substantial appreciation in the share price as the company gains further traction in its grocery delivery service, and the technology element of Ocado’s product suite.
“Ocado shareholders finally received some good news yesterday in the form of a strong half year update, with group revenues up almost 13%. The strong share price reaction came as management upgraded profit guidance for the full year,” explained Michael Field, European Equity Strategist, Morningstar.
“Underlying this strong performance was Ocado’s Technology Solutions business, the area of the company that deals with automation, fulfilment, and the online grocery market. Technology Solutions saw growth of more than 20% in the first half of the year, with an operating margin of 14.5%, materially higher than the rest of the Ocado business.
“Some investors might expect that shares are up with events after a near 15% move in the share price, but we believe there is far more to come with this story. Our fair value estimate for this stock is GBX 920, almost triple the current share price!
“How do we square the difference between our fair value and the GBX 400 consensus target price? Ultimately it comes down to small differences in assumptions, but over a very long time period. Over the longer term we believe online penetration will reach 25% of the grocery market, with this generating strong growth for both Ocado’s retail and technology solutions businesses.”
Ocado shares were trading at 358p at the time of writing.