Shares in online grocery retailer Ocado (LSE: OCDO) jumped by as much as 7% in early trade this morning, after the company reported an upbeat set of results for its fiscal 2016.
The retailer, which has been struggling to grow profit since its IPO, reported an increase in profit before tax for 2016 on double-digit revenue growth.
For the year, the groups statutory profit before tax and exceptional items rose 21.8% to 14.5m, from 11.9m last year, while reported profit before tax for the year rose 1.3% to 12.1m, up from 11.9m in the prior year. Earnings per share for the year came in at 1.96p, compared to 1.91p last year. On the top line, gross sales including VAT and marketing vouchers increased 15% to 1.3bn.
The good news is that Ocado beat the Citys estimates for its growth last year. Analysts were expecting a pre-tax profit of 11.3m and earnings per share of 1.7p, down 14% year-on-year. The bad news is that while the groups earnings are heading in the right direction, cash generation remains elusive. Net debt widened to 165m from 127m at the end of 2015.
Plenty of work to do
Unfortunately, while Ocados results today showed that the companys sales and profit figures are moving in the right direction, concerns about the groups overall direction and how it will continue to grow in the UKs increasingly hostile retail environment remain.
Ocados management has been touting the sale of the groups technology to an overseas bidder for much of the past two years, in an attempt to show the City that the company has something other companies want and are prepared to pay for. However, a deal has not yet emerged, despite assurances from management that it is in discussions with several interested parties. Today, the company announced once again that theres no overseas deal signed yet and that talks are continuing.
Still, Ocado is growing in its home market, but it remains to be seen for how much longer this will continue. The company pegged a rise in active customer numbers of 14% during 2016 while the average customer order grew by 18%.
Ocados shares may be rising today, but unless the company can push its growth rate higher, the market might lose patience with the firm. The shares are currently trading at a P/E of 135 based on fiscal 2016 figures, a sky-high multiple for a company thats struggling to grow earnings.
Compared to its brick and mortarpeer Morrisons (LSE: MRW), Ocado looks like a very bad investment indeed. As Ocados earningsstagnate, Morrisons earnings per share are forecast to expand by 38% for the year ending 31 Jan 2017 and a further 11% for the year after. Shares in the retailer are currently trading at a forward P/E of 22.1, which is expensive but looks cheap compared to the projected growth rate. Unlike Ocado, shares in Morrisons also support a dividend yield of 2.2%.
The bottom line
All in all, even though shares in Ocado are rising today, the firm still has a long way to go before the shares look attractive at their current valuation. Morrisons could be a better buy.
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