On Monday, Bernstein SocGen Group issued a downgrade for Ocado Group Plc. (LON:OCDO:LN) (OTC: OCDGF), shifting its rating from Outperform to Underperform. The new price target set by the firm is £2.60, a significant drop from the previous £10.00.
In a recent statement, the firm explained the rationale behind the downgrade, highlighting several challenges facing Ocado. The company's anticipated growth in online groceries and customer fulfillment center (CFC) economics has not met expectations. The firm noted that the online grocery market has not seen a resurgence post-pandemic and the ramp-up of CFCs has been slower than anticipated.
Bernstein SocGen Group pointed out that partnerships with companies like Kroger (NYSE:KR) and Sobey's have been put on hold, while projects with Coles have been delayed. Due to these developments, the firm has made adjustments to its financial model for Ocado, resulting in the lowered price target.
The analysis also forecasts that Ocado may require additional capital, estimating a need for between £0.5 billion to £1 billion. This is in addition to the company's existing need to refinance £1.45 billion in debt over the coming two to three years. The firm has increased Ocado's weighted average cost of capital (WACC) from 9% to 12%.
Looking ahead, Bernstein SocGen Group identified several potential catalysts for Ocado, including the company's debt refinancing in the second half of 2024, updates from partnerships with Kroger, Coles, and M&S, and the possibility of an additional capital raise.
In other recent news, British online supermarket Ocado Group PLC has seen its stock target revised by both HSBC and CFRA. HSBC lowered its price target for Ocado to GBP2.85 from GBP3.70 while retaining its Reduce rating, citing a slower trajectory for live modules and a lower improvement in the percentage of capacity fees generated by Ocado's Customer Fulfilment Centre (CFC) model. Similarly, CFRA maintained its Hold rating but trimmed the price target to £4.00 from £6.00, reflecting adjusted expectations for the company's near-term growth prospects.
The earnings per share (EPS) forecast for Ocado has been adjusted to a loss of £0.42 from a loss of £0.30 for FY24 and to a loss of £0.30 from a loss of £0.21 for FY25, according to CFRA. These adjustments are due to the slower than expected progress of Ocado's current CFC roll-out. Additionally, a strategy shift by Ocado's key partner, Kroger, has led to the closure of three Ocado-powered facilities, which is seen as a negative indicator of future performance.
Despite these developments, investors are directed to look forward to Ocado's Annual General Meeting (AGM) scheduled for April 29, 2024, and the first half results of the year, which will be announced on July 16, 2024. These events are expected to serve as the next potential catalysts for the company's stock performance. However, CFRA suggests that for market sentiment to improve, Ocado's Technology Solutions segment needs to demonstrate more significant progress.
InvestingPro Insights
Following Bernstein SocGen Group's downgrade of Ocado Group Plc., real-time metrics from InvestingPro show a mixed financial landscape for the company. Ocado's market capitalization stands at $3.72 billion, indicative of its significant presence in the industry despite recent setbacks. Notably, the company's revenue has grown by 12.25% over the last twelve months as of Q4 2023, suggesting that while growth may have been slower than expected, the company is still expanding its top line.
InvestingPro Tips highlight the stock's recent performance, with a noteworthy return over the last week. However, concerns are raised regarding Ocado's profitability, as analysts do not anticipate the company will be profitable this year, and the stock has experienced a substantial decline over the last six months. Additionally, while Ocado's liquid assets exceed its short-term obligations, suggesting some financial resilience, the company's gross profit margins remain weak, which could be a point of concern for potential investors.
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