Ocado Shares Surge Over 50% on Shock US Deal

Ocado shares soared after the firm announced a deal with US supermarket Kroger

Holly Black 17 May, 2018 | 12:12AM
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Ocado shopping bags

Ocado (OCDO) looks to have delivered on its promise of major international expansion after announcing a deal with US supermarket group Kroger.

It’s the latest in a string of moves by grocery retailers to futureproof their businesses, and the third overseas partnership Ocado has secured since November.

After closing on Wednesday at 554.2p, Ocado shares climbed as high as 997p after midday but dropped back to 856p in early afternoon trading, a gain of over 50% on the day.

Supermarkets were spooked last summer when internet behemoth Amazon announced a deal with grocery retailer Whole Foods. It is the feared the retail giant could force a race to the bottom on prices, which could have serious ramifications for the profits of high street players.

Since then, Tesco has entered into a tie-up with wholesaler Booker and, more recently, Asda and Sainsbury’s surprised the market with plans to merge. It shows that the retailers are taking the threat of online competition very seriously as well as looking for ways to protect their market share from the rise of discount rivals Aldi and Lidl.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “It’s no coincidence that a number of deals have been flushed out since Amazon announced a takeover of Whole Foods last summer. The threat of a big disruptor entering the sector puts pressure on food retailers to be on top of their game when it comes to online deliveries.”

Food, Technology and Logistics

The latest surprise from the sector comes from Ocado, which today revealed a partnership with Kroger to license its technology in the US. The agreement will see Ocado’s technology used in the US exclusively by Kroger, with Ocado receiving monthly exclusivity and consultancy fees.

Khalaf explains: “Ocado is known in the UK as an online supermarket but that’s actually just the tip of the iceberg – it is primarily a technology and logistics firms and with that comes the potential to license out its services to grocers around the world. Indeed, there seems to be a bit of a queue forming.”

In its most recent trading statement, Ocado reported retail revenue had grown 11.7% in the 13 weeks to March 4 to £363.4 million. The business processed an average of 280,000 orders a week.

Analysts at brokers Numis say its “clearly a transformative deal for Ocado and one that is on a completely different scale to those announced in the past”.

Kroger is one of the largest grocery retailers in the world, recording revenue of $122bn in 2017 – the group has around 2,800 stores across 35 states.

While a 50% share price surge was welcomed by investors, it was a significant blow to the hedge funds that have bet against the business. Some seven firms have short positions in Ocado including GMT Capital Corp with a 1.89% short stake, Kairos Investment Management at 1.51% and Marshall Wace at 1%.

Khalaf adds: “Short sellers were hoping Ocado wouldn’t deliver on its international expansion plans, and that position now looks like a badly busted flush. However, Ocado’s share price is looking forward to future earnings based on licensing out its online delivery technology rather than the revenues it is currently making from food retail.”

Numis has a ‘buy’ rating on the stock and target price of 800p. It says: “With a significant long-term earnings runway now in place, we retain our positive stance.”


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Ocado Group PLC363.10 GBX0.86Rating

About Author

Holly Black  is Senior Editor, Morningstar.co.uk


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