Ocado still loss-making and car retailers bounce back

“UK, European and Asian shares followed Wall Street’s plunge last night with a weak session on Tuesday. Ongoing flare-ups with coronavirus in the US raised concerns that the country is struggling to get the pandemic under control. Making matters worse was heightened tensions between the US and China, this time over offshore resources in parts of the South China Sea,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 1.1% to 6,107 with technology, consumer cyclicals and industrials firmly out of favour. Tech-heavy investment trust Scottish Mortgage was caught up in the sell-off with its shares falling 5.9%, making it the second worst performer on the FTSE 100.

“Investors switched allegiance to parts of the market deemed safer in times of strife, bidding up stocks in the tobacco and utility sectors. Normally in these situations you would expect to see people flock to gold, yet the precious metal price was unmoved at $1,795 per ounce."

Ocado

“It says a lot when grocery demand has gone through the roof and Ocado still can’t generate a profit. The loss-making position is a result of increased costs from setting up overseas projects, essentially spending money today to make money tomorrow.

“This waiting game has defined Ocado for some time as it plants flags in various countries, helping other grocery retailers to set up their online fulfilment operations using its platform.

“At some point in the future it should begin to make a profit, and this needs to happen sooner rather than later as the clear opportunity to advance online grocery services around the world will be attracting competition. After all, if there is such as an obvious opportunity, lots of people will want a bite at the cherry.

“Lockdown measures globally will have accelerated the trend towards ordering food and drink online. Any retailer which doesn’t have a decent online fulfilment service will be thinking seriously about making that investment now, so they don’t get left behind in the highly competitive world of grocery sales.

“Ocado wants to be the ‘go-to’ platform provider of choice, which explains why the business is valued at more than £15 billion yet is still loss-making. The market is effectively pricing in the growth potential for the business today.

“Its own grocery delivery is somewhat of a sideshow to where the business wants to be longer term and this operation is now a joint venture with Marks & Spencer.”

Car sellers: Motorpoint/Vertu

“The car could be set for a comeback. Fear of infection has seen use of public transport plummet and it doesn’t feel like a stretch to see this trend continuing as those who can afford it opt for the relative isolation of their own vehicle.

“This might not be good news for the environment, but it would be a positive development for car dealerships like Vertu Motors and Motorpoint.

“Remarkably Vertu actually posted a better profit in June 2020 than it did in June 2019 with pent-up demand and savings on things like un-booked holidays also seeming logical factors for the business to cite. What is particularly encouraging is that the momentum has continued into July.

“The job cuts announced by the company may have had a similar cost-saving motivation as lots of other businesses but also reflect an increasing comfort with a more automated sales process which was effectively on trial through lockdown.

“Second-hand car specialist Motorpoint’s decision to pull the dividend is understandable but again trading volumes are up year-on-year with margins proving surprisingly resilient. It has also made a move towards automation with fully contactless sales routes.

“The industry faces a bigger test down the road as the full economic fall-out from coronavirus hits consumers. It is telling that neither Vertu nor Motorpoint are prepared to map out earnings guidance at this stage.”

These articles are for information purposes only and are not a personal recommendation or advice.