While Ocados losses narrowed, analysts have remained catious of backing a retailer yet to record an annual profit

While Ocado's losses narrowed, analysts have remained catious of backing a retailer yet to record an annual profit

Ocado shares shot up today (1 February) as the UK online grocer saw its full-year losses narrow and its sales grow 29% during its first year as a listed company. The company's share price has been helped in recent weeks by speculation that it might be on the verge of being acquired but analysts have remained cautious of backing a retailer that is yet to record an annual profit.

Clive Black - Shore Capital
"We may in time be considered over-cautious and possibly 'Neanderthal' on Ocado. Whilst continuing to acknowledge its excellent customer service in the main, we remain to be convinced that there is a compelling business model that merits a materially premium stock rating to the market and the sector, the prime factor behind our cautious stance on the share. That stance was never going to change with the first set of results and may not have changed by the fifth set if strong earnings are not delivered. We will update on our 2010/11F forecasts once we've spoken to management.

"As to potential corporate activity in Ocado, which is widely talked about, this is helpful to prevent shorting activity but its substance is surely more questionable. If the likely suitors were real we would have expected Ocado and the UK regulator to have made comment before now. Additionally, the short-selling difficulties seemingly support the share price too, albeit this is not a sustainable nor compelling source of support to our minds. We believe that Ocado stock is overvalued for the financial performance that company produces now and for the foreseeable future."
 
Justin Scarborough - RBS
"Clearly there is a long way to go but the model is delivering according to plan and we continue to expect strong sales and profit momentum. The caveat on the stock is valuation and at last night's close, Ocado is trading at our fair value calculation.

"Bid speculation has played its part in moving the shares up in recent weeks, although we would suggest that Morrisons would not be interested in the group, although Amazon is often mentioned and given its grocery online launch last year (not a very good one in our view), it may have greater ambitions in this space."

Neil Saunders - Verdict
"Moving into profitability in the final quarter is great news for Ocado and will potentially provide a boost to the company's beleaguered share price. However, one quarter of profit does not necessarily show that the company is on a firm trajectory to continued profit growth.

"There are a whole host of downside risks this year including a more frugal consumer trading away from some of the more expensive goods Ocado sells, Waitrose Deliver moving into Ocado's core London market and the increased costs of delivery through higher oil and fuel prices. While Ocado's customer proposition is in excellent shape, the financials of the company are sensitive to all of these shifts which could provide disruptive to continued profit growth."