JP Morgan has told would-be investors of Ocado Group PLC (LON:OCDO) to wait for a “better entry point” before piling their money into the online supermarket.
Ocado shares have doubled over the past six months on the back of two international partnership deal for its smart platform.
READ: Ocado shares soar as it inks another international deal
Analyst Marcus Diebel thinks that surge means the stock is now expensive when compared to its ‘European Internet’ peers and has downgraded his recommendation to ‘neutral’ from ‘overweight’ as a result.
READ: Goldman downgraded by Goldman Sachs after recent outperformance
“Visibility on future revenue growth (we assume +14%/+13% in 2018/2019) is arguably high with new fulfilment centres coming into operation, but post the recent share price performance, we turn neutral on valuation grounds,” wrote Diebel in a note to clients.
He is far from bearish though, pointing out that there are several growth drivers still intact.
Diebel notes that there are still plenty more UK households for Ocado to target, while he also highlights the “increasing deal momentum” in the solutions business.
On top of that, further automation in the fulfilment centres s solving capacity constraints, while cash generation is improving as these centres become more mature.
Near-term estimates lowered
Updating his estimates for the first time this year, the analyst lowered his near-term forecasts primarily due to investments, although he has “strongly increased” his mid- and long-term growth estimates.
For 2018, Diebel now expects Ocado to generate underlying earnings of £86mln on revenues of £1.63bn (down from £125mln/£1.67bn previously), with this rising to £105mln and £1.84bn in 2019.
He adds: “Clearly, additional upside potential comes from further announcements in regards to possible deals in the Solutions business and Amazon Fresh performing less strong in the UK than anticipated.
“However, the shares trade on 36x 2018 enterprise value-EBITDA [ratio]…which is one of the highest ratios in our sector.”
Despite the downgrade to ‘neutral’ from ‘overweight’, Diebel hiked his price target for the stock to 505p (from 390p), although that was below yesterday’s closing price of 524p.
Shares fell 4% to 503.4p in mid-morning trade.