Ocado soars after lifting FY guidance; technology business leading

Investing.com - Ocado (LON:OCDO) stock surged Tuesday after the online grocer upgraded its annual guidance, citing an improvement in the profitability of its warehouse technology business.

At 07:15 ET (11:15 GMT), Ocado stock rose 11% to £3.80, after falling around 50% year to date.

This optimism is based on Ocado’s technology business, which sells automated robots and software to supermarkets to help them boost their ecommerce operations. The company said it would achieve a profit margin in the mid-teens, up from a previous forecast of more than 10%. 

The group is also targeting a £150 million improvement in underlying cash flow this year, up from £100 million previously. 

The improving outlook for the technology business came alongside Ocado’s first-half results, which showed that its pretax losses narrowed to £154 million from £289.5 million the previous year, while group revenue increased 12.6% to £1.5 billion. 

The company runs an online grocery service in Britain through a joint venture with Marks&Spencer (OTC:MAKSY), and is contending with falling sales after a boom during the pandemic. 

“I’m not concerned in investors losing confidence because they shouldn’t be losing confidence. We’ve got a clear plan and we’re executing to that clear plan,” CEO Tim Steiner said.

“We believe this set of results should be reassuring, given bearish positioning into the results (with Ocado shares de-rating by c.10% yesterday and by more than 20% in the last 3 months, on EV/sales),” said analysts at RBC Capital Markets, in a note.

“We view Ocado's technology solutions as industry-leading,” RBC added, “however on analysis of the Group's cash flow potential, its mid-term targets appear ambitious. Moreover, with downside risk to Group estimates and a lower probability of further game-changing international deals, we remain cautious on Ocado.”

RBC maintained an ‘underperform’ rating, with a £4.20 price target.