The Rise and Fall of Ocado: Middle-England’s Favorite Grocer Suffers Share Price Drop
Ocado Group Plc’s stock has gotten a much-needed boost from merger news involving one of its partners, stemming a slump that had seen the technology-focused UK grocer lose three quarters of its value this year.
Shares of Ocado rallied as much as 12% on Friday, after an 11% gain in the prior session, as Kroger Co. said it agreed to acquire rival Albertsons Cos. to create a US grocery giant, confirming an earlier Bloomberg report. The deal could mean an increase in the number of automated warehouses that Ocado is building for Kroger, according to Morgan Stanley.
“The bull case here would be that Ocado’s exclusive relationship with Kroger could enable Ocado’s customer fulfillment centers to service the volumes from Albertsons in the future,” analyst Luke Holbrook wrote in a note to clients before Kroger and Albertsons confirmed their plans to combine.
Holbrook expects the deal could potentially add seven more of Ocado’s customer fulfillment centers (CFCs) for Albertsons. Estimating a net present value of the CFC at roughly at 55 million pounds each, he says that could translate into a 47-pence-per-share gain for the UK company.
Kroger and Ocado already have a plan to build as many as 20 automated grocery warehouses in the US to help Kroger turbocharge its e-commerce operation.
Former market darling had given up nearly all of its huge gains
The news pushed up more than Ocado’s equity: the company’s £500 million of convertible bonds maturing in 2025 also gained, while remaining well within so-called “distressed” territory, when prices drop below 80 cents on the dollar.
The upmarket grocery brand associated with Britain’s more affluent neighborhoods was once a market darling, but has suffered a remarkable change in fortunes, wiping out a 600% rally that began in 2018 and peaked during the pandemic.
It failed to capitalize on a surge in delivery demand spurred by Covid-19 lockdowns, while cash-rich rivals like Tesco Plc pushed ahead. Ocado’s ambition to license its robotic warehouse systems globally has also hit a speed bump as online penetration slowed. A recent sales warning triggered ratings downgrades from analysts at Credit Suisse and HSBC. And Morgan Stanley last week cut its price target to the lowest among 21 analysts tracked by Bloomberg, to 420 pence versus the current level of about 480 pence.
A spokeswoman for Ocado declined to comment.
Meanwhile, several analysts have buy-equivalent ratings on Ocado, including Bernstein, whose 1,500 pence price target suggests the stock could more than triple in value. Ocado’s international solutions business is “under-appreciated by the market,” analyst William Woods wrote in a note to clients.
Ocado was 11% higher by 1:30 p.m. in London Friday, headed for its sharpest two-day gain since May 2018.
— With assistance by Lisa Pham
