Ocado's shares keep delivering

Ocado's shares have risen 35% this month, on top of a 20% rise in December. Is Morrisons about to take a bite?

by Dave Waller
Last Updated: 06 Nov 2012

Shares in Ocado closed at 239p yesterday, capping an 80% rally since the rather rotten-tasting low of 120.9p back in October.

It’s all a sign of a remarkable turn-around at the online grocer. When it floated six months ago, its float price was quickly cut - after critics ridiculed the long-term prospects of a business model that was little more than a load of fridges on wheels and the odd parsnip.

But with several big supermarkets keen to bag some of the delivery success experienced by Tesco, it seems the Ocado model has suddenly gained some currency.

Current speculation centres around Morrisons – while Ocado refuses to speak about takeover speculation, the supermarket has been rumoured to be in the frame since November, and it will be keen to stop Tesco painting its blue and white stripes all over the online grocery market as well as it has in out-of-town stores.

There may, however, be less to it than that. Some analysts say it’s more due to a ‘technical squeeze’, with US hedge fund investors scrambling to close a short position, driving up the price of available shares. This means the rise will be short-lived.

The turnaround is certainly marked. Back when it listed in 2010, its shares were valued at 180p – and quickly sank to an embarrassing low of 120.9p in October. But its results suggest CEO Tim Steiner is correct to say they’ve proved the doubters wrong: sales were up 29% to £551.1m in the year to 28 November, and annual profits of around £21m are expected in next month's results.

As to how it’d fare on its own, the jury’s still out: growth predictions for 2011 range from 15% to a healthy 29%. But this may be the optimum time to buy. The John Lewis pension fund is is currently locked in to an 11% stake, but that’s due to end soon. 

Still, we can’t help wondering whether Morrisons would really consider itself a good match. Ocado is at the swanky end of the grocery chart, Morrisons is relatively grubby to say the least. Yes it may be desperate to get a slice of the online market before Tesco eats it all, but it will need to be careful to get the offering just right if it’s to avoid suffering the same fate.

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