Down 90%, is this FTSE 250 icon now a screaming buy?
The FTSE 250 has generated a near-32% return over the last five years, including dividends. While thatâs not as impressive as the near-94% gain from the FTSE 100, itâs nonetheless significantly ahead of the 90% loss that Ocado (LSE:OCDO) shareholders have had to endure.
The online grocery retailer and warehouse automation specialist has encountered a long list of problems over the years, from rising costs to top-tier customers rethinking their relationships.
The latter has been particularly painful. However, with Kroger breaking its contract, Ocado’s getting a handy short-term cash injection. And with its exclusivity requirements now out the window, the group can pursue other relationships to get operations back on track.
So could investors be looking at the beginning of a multi-year recovery story?
The bull case
The setbacks with retailers such as Kroger and, more recently, Sobeys have proven that Ocadoâs original âone-size-fits-allâ warehouse automation business model has failed commercially. The high initial capital costs simply make it too financially challenging for customers, even in the long run.
In response, Ocado’s been shifting towards a more modular deployment approach, allowing retailers to use Ocadoâs robotics and automation solution at a much smaller scale and with a much smaller initial capital commitment. And there are some signs this new approach could be working.
In fact, Ocado could be on the verge of turning cash flow positive this year. And providing no more surprise spanners are thrown in the works, by 2027, that could turn into positive free cash flow â a critical step towards financial independence.
If Ocado can demonstrate a path to profitability with its robotics technology, and its online grocery joint venture with Marks & Spencer continues to perform robustly, then this FTSE 250 stock could indeed be set for a rebound.
The risk remains high
Kroger’s decision to shut down three of its eight automated Ocado-powered customer fulfilment centres is a major red flag. If one of the largest retailers in the world was unable to make the technology work, convincing other smaller retailers to try is going to be a tough sell for Ocadoâs marketing team.
Another significant challenge is the firmâs problematic debt. With £1.8bn of expensive debt & equivalents on its balance sheet, the firm’s now bleeding more than £100m a year to interest payments alone.
Luckily, management’s receiving $350m from Kroger as a penalty for breaking its contract, which has put aside any immediate liquidity crisis. But thatâs ultimately only a short-term fix. If Ocado isnât able to reach its goal of turning free cash flow positive next year, the debt problem could once again re-emerge down the line.
The bottom line
Looking ahead, there’s a plausible future where Ocadoâs change in strategy puts the business back on track within a few short years. However, this is going to be an uphill battle dependent on strong execution. And with no new partner announcements made since the groupâs exclusivity ended, the risk-to-reward ratio doesnât look particularly enticing right now.
The company is reporting earnings later this week, so it wonât be long before investors get a detailed update on how things are progressing. For now, Iâm keeping Ocado on my watchlist and looking for other opportunities in the FTSE 250.
The post Down 90%, is this FTSE 250 icon now a screaming buy? appeared first on The Motley Fool UK.
Should you invest £1,000 in Ocado Group plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Ocado Group plc made the list?
More reading
- Warning: the Ocado share price could go bananas on 26 February
- Down 91%, here’s what it would take for the Ocado share price to rally
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
