Compare and contrast.
On Tuesday morning, Goldman Sachs initiated coverage of Ocado with a “buy” rating and a 200p target price:
We initiate on Ocado with a Buy rating and a 6-month price target of 200p, implying 39% potential upside. In our view, Ocado’s differentiated business model (proprietary centralised, semi-automated distribution and delivery network) results in a superior customer offering relative to other online grocers in the UK (e.g. more flexible delivery slots, higher order accuracy), hence, the company is well placed to benefit from the structural shift towards online grocery. We expect the UK online grocery market to more than double over the next five years, from c.£3 bn in 2009 to over £7 bn in 2014 and Ocado’s sales to grow at a 26% CAGR over the same period.
Meanwhile, Morgan Stanley, which wasn’t a bookrunner on the bungled flotation, has started coverage with an “undeperform” rating and an 80p target price:
Initiating with an Underweight rating and an 80p price target: We are big fans of Ocado’s customer proposition, but are rather less keen on its business model. We believe that the shares are likely to underperform the industry much further in the coming months.
The report, from veteran retail analyst Geoff Ruddell, challenges the bullish assumptions of Goldman and others, about the internet grocery market:
We think the UK online grocery market will grow much more slowly than the bulls suggest: We argue that the economics for online groceries only makes sense for £100+ baskets. However, such transactions account for only 11.5% of all grocery sales in the UK. With c.2.5% online grocery penetration already, we believe that the market is already much more mature than many commentators realise.
And concludes that Ocado’s market share could actually start to decline from next year as the competition – not least from Waitrose — increases:
Our proprietary research suggests that Ocado’s share of the UK online grocery market may decline from next year We also believe that it would be very optimistic to assume that Ocado can maintain its current c.14% share of the UK online grocery market indefinitely, let alone grow it further.
Indeed, with 50% of Ocado’s sales coming from within the M25 (a market in which WaitroseDeliver is likely to launch next year), and both M&S and Morrisons yet to launch online grocery services at all, we believe that Ocado will struggle to grow as fast as the UK online grocery market over the next few years.
Not the high growth opportunity it was billed as.
Still it takes two to make a market and Goldman doesn’t have the worst record when it comes to UK IPOs this year. That dubious honour goes to another Ocado bookrunner — UBS.
From the FT:
Of the 31 European IPOs this year that have raised more than $100m (£64.7m), 16 were trading below their issue price by the close of trading last Friday, according to Dealogic data. The average performance of the five UBS-backed European IPOs this year has been a drop of 1 per cent. That was worst of the seven banks that have worked on three or more flotations in Europe that raised more than $100m in 2010.
The average performance of the six IPOs backed by Goldman Sachs among the 31 deals has been a drop of 0.7 per cent. The three IPOs worked on by Bank of America-Merrill Lynch have performed the best of the seven banks, rising an average of 14.3 per cent.
Meanwhile, Ocado, shares were little changed in early trading on Tuesday:
And a date for the diary — Ocado reports half year results a week from today, Tuesday.
Update: And behold, UBS have also started coverage of Webvan. They reckon it is worth 167p — ie below the 180p float price.
Hmm. That’s not very supportive is it?
Unique player in a growth market with key economic advantages Ocado has a 13% (and rising) market share in the UK online grocery segment – a channel that we estimate could grow by c15% p.a. for at least the next five years. We believe that Ocado’s unique, centralised operation gives it key economic benefits relative to the mainstream grocers’ store picking models.
Ocado’s unique nature, high growth rate, and changing profitability and cash flow profiles create significant valuation challenges. We value the company using EV/sales and EV/EBITDA comparatives, plus a DCF. The average of these measures, which drives our price target, indicates fair value at 167p per share. While recognising the wide variety of potential outcomes, we believe the current share price fails to capture fully the risk-weighted growth opportunity for Ocado.
Related link:
UK investor power scuppers many IPOs – FT Alphaville