JP Morgan downgrades Ocado as shares push valuation envelope

Analysts at JP Morgan downgraded their recommendation on Ocado shares following their recent sharp outperformance versus the sector, which they argued was pushing the valuation envelope too far.

Over the past six months, they had climbed 76%, on the back of the addition of two new partners for its Solutions arm, Casino and Sobeys, versus an average gain of 0.4% for its sector benchmark.

True, visibility on future sales growth was "arguably high", but that had pushed the stock's EV/EBITDA multiple to 36 times, implying a compound annual growth rate for operating profits for between 2018 and 2020 of 25% - the highest ratio in the European Internet space.

So now, and with their own estimates in-line with the company-compiled consensus, they downgraded their recommendation from 'overweight' to 'neutral' as they waited for a better 'entry-point'.

Nevertheless, they "strongly increased" their mid and long-term growth estimates, in particular at its Solutions arm, leading to an upwards revision to their target price for the shares from 390p to 505p.

Among the main drivers of the online grocer's sales, they mentioned its low share of UK household penetration, that increased automation at its fulfillment centres would solve capacity constraints, higher cash generation at its CFCs as they mature and greater deal momentum in Solutions.

JP morgan also flagged that the company was at a 'tipping point' in regards to its profitability.