Online grocery stock Ocado Group (LSE: OCDO) made a surprise entry into the FTSE 100 last year, when its share price doubled after a string of new international deals were announced.
Retailers appear to be queuing up to use Ocado’s automated warehouse technology. And it does sound impressive. The company has lodged 322 patent applications over the last three years, covering areas such as robotics, artificial intelligence, real-time control systems and machine learning.
Robotic picking is being tested in the firm’s Andover warehouse and the company hopes to bring this into operational use in the next few months.
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Sales +12.3%
Ocado would like to be seen as a technology stock whose UK grocery retail business acts as a shop window for potential customers. Arguably, I think it’s succeeding.
Last year’s string of contract wins seemed impressive to me. The company is now operating in the USA, Canada, Sweden, France and Spain, as well as the UK.
The UK retail business is also continuing to grow, with sales up by 12% to £1,475.8m last year.
The only problem is that this business doesn’t make any money. Today’s figures show a group operating loss of £31.9m for 2018.
In my opinion, the real problem is that Ocado can’t scale up like a true tech firm. An online-only business can deliver rapid, profitable growth with very little investment. All it needs is more users.
For Ocado, the opposite is true. Every new deal or expansion requires the firm to build more of its clever warehouses. Management expects to spend £350m next year as it starts building warehouses for the customers who signed deals in 2018. Only after this will these contracts start to generate any revenue.
In the meantime, the UK retail business is clever but remains very small, with annual sales of about £1.4bn, compared with £17.3bn for the UK’s fourth-largest supermarket, Morrisons.
Ocado may end up being a good business, but it’s expected to lose money again next year. Despite this, the shares are valued at 4.4 times 2018 sales. In my view, the shares remain far too expensive. For me, this is one to avoid.
A real quality growth stock
If you’re interested in high-quality FTSE 100 stocks with outstanding growth, then one company I’d consider is London Stock Exchange Group (LSE: LSE).
This group owns the essential ‘plumbing’ that lies behind the London Stock Exchange and a number of other markets. At the heart of the company’s commercial success is its ability to provide data and transaction services that financial institutions depend on.
LSE shares have risen by 200% since the end of 2013. The group’s profits have kept pace with this growth, rising from £216m in 2013 to £598m for the year to 30 June 2018.
Buy and hold forever?
LSE shares have rarely been cheap but in contrast to Ocado, LSE’s demanding price tag has usually been backed up by strong results. The dividend has doubled since 2011 and was not cut during the financial crisis. Adjusted earnings growth is forecast at 14% for 2018 and 16% in 2019.
Trading on 27 times 2018 earnings with a 1.3% yield, this stock is a long-term investment. But I think it could be a good stock to buy and hold forever, topping up during market dips.
