Ocado slumps on Exane downgrade

Ocado traded sharply lower on Wednesday after Exane BNP Paribas downgraded the stock to ‘underperform’ from ‘neutral’, keeping the price target at 215p, as it pointed to margin pressure and said the market’s expectations for profitability were too high.

The bank said its gross margin assumption was the most important it makes in its Ocado model and once again, it expects it to be down in the second half.

Exane said that with the next couple of years burdened by new distribution centre costs, earnings progression will fall short of market expectations. “More importantly that weak earnings development may cause a potential new partner to return to their spreadsheet and think again.”

“With enough volume, Ocado may have the world’s most efficient food picking model but it needs big basket shoppers with good gross margin to make a profit. Gross margin however is dictated by painful industry forces and Waitrose’s pricing policy (even if it can’t dictate Ocado’s prices directly).”

In addition, Exane said progress in earnings before interest and taxes was likely to be subdued in the next three to four years.

“Because we doubt that the gross margin tension we’ve seen in recent periods will unwind quickly and that new capacity costs will impinge cost to serve, we doubt that group EBIT will see meaningful development.”

The bank said it was also worth noting that part of the Morrisons.com partnership income will drop out in 2018 too. It pointed out that this was worth around £5m a year, although it is partially compensated for by growth at Morrisons.com.

At 0922 BST, Ocado shares were down 6% to 262.30p.