Deploying On Grid Robotic Pick Systems Will Reduce Labor Costs And Improve Future Efficiency

Key Takeaways

• Ocado's automation systems and strategic cost control are expected to improve net margins and boost earnings in the coming years.
  
• Expanding the CFC network and enhancing logistics will drive revenue growth and maintain steady cash flow, bolstering liquidity and financial flexibility.
  
• Delays in growth initiatives and high costs strain Ocado's net margins and cash flow, despite revenue growth and ambitious global partnership plans.

Catalysts

Operates as an online grocery retailer in the United Kingdom and internationally.

• Ocado Group is focusing on deploying innovative automation technologies, such as On Grid Robotic Pick systems, to reduce labor costs and improve order fulfillment efficiency, which is expected to increase net margins and positively impact earnings over the next few years.
  
• The company is expanding its customer fulfillment center (CFC) network with significant sites planned to go live in multiple international markets by FY '27, which should drive revenue growth as these facilities increase their capacity and operational footprint.
  
• Ocado is aiming to reduce its technology R&D spend to 20% of recurring revenue by FY '27, which reflects a strategic shift towards cost control and improved cash flow management, further enhancing net margins and long-term earnings potential.
  
• With strong liquidity and financial flexibility, Ocado is strategically investing in expanding and enhancing its logistics and retail businesses, which are expected to maintain steady cash flow generation and support corporate liquidity, positively affecting net margins.
  
• Ocado's Technology Solutions division is focusing on increasing recurring revenue from new and existing modules, which should contribute to more stable revenue streams and improve earnings as the business shifts towards a more capital-light, recurring model.

Ocado Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ocado Group's revenue will grow by 49.3% annually over the next 3 years.
• Analysts are not forecasting that Ocado Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ocado Group's profit margin will increase from -24.8% to the average GB Consumer Retailing industry of 2.6% in 3 years.
• If Ocado Group's profit margin were to converge on the industry average, you could expect earnings to reach £106.9 million (and earnings per share of £0.13) by about March 2028, up from £-301.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.7x on those 2028 earnings, up from -7.1x today. This future PE is greater than the current PE for the GB Consumer Retailing industry at 14.9x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Ocado Group Future Earnings Per Share Growth

Risks

• Ocado's growth in deploying reimagined products and CFCs is reportedly behind expectations, which could impact revenue growth and future partnerships if not addressed swiftly.
  
• Delays in some U.S. CFC sites, like those for Kroger, push expected go-live dates and may impact future revenue and EBITDA growth projections negatively due to potential deferred earnings.
  
• Despite positive revenue growth figures, Ocado still reports a loss before tax, and ongoing high depreciation and amortization costs could strain net margins if not effectively managed.
  
• Significant investments in logistics, finance, IT, and HR systems, despite their potential long-term benefits, are currently increasing costs, possibly affecting short-term net margins and cash flow.
  
• Ocado’s ambitious plans to grow live modules and partner with major global firms could face execution risks or competitive challenges that may impact potential earnings if not realized as planned.

Valuation

• The analysts have a consensus price target of £4.391 for Ocado Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £9.2, and the most bearish reporting a price target of just £2.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £4.0 billion, earnings will come to £106.9 million, and it would be trading on a PE ratio of 42.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of £2.6, the analyst price target of £4.39 is 40.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.