June 23, 2020
Delivery companies have been one of the most sought-after stocks recently with people around the world stuck at home, waiting for this disaster to end.
The UK-based online grocery retailer, Ocado, has seen a massive spike in customers over the past few months together with Delivery Hero, the German-based online food delivery company which has also seen food delivery orders surge to unprecedented numbers.
These two companies have a somewhat similar business model, however Ocado has another key source of income through its monetization of Intellectual Property (IP) and technology used for online retailing, logistics and distribution of grocery and consumer goods, supplied by local retailers. Ocado offers end-to-end operating solutions for online grocery retail, based on technology and IP which it not only uses to run its own operations, but is also applicable for the operations of its commercial partners.
Delivery Hero on the other hand, has been acquiring companies globally, expanding market share in the online food delivery space. Acquiring large competitors and eliminating competition has resulted in the company becoming the number one global leader in online food ordering and delivery. With operations in MENA, Asia, Americas and Europe, Delivery Hero has managed to grow and scale their business exponentially especially thanks to Covid-19.
How do these two companies size up against each other in terms of quality, value and momentum?
Analysing quality based on Return on Assets (ROA), which is calculated as Net Income divided by Total Assets, indicates how profitable a company is relative to its total assets. It gives investors an idea of how efficiently a company’s management is using its assets to generate earnings.
Ocado’s ROA has experienced a continuous downward trend, most recently resulting in a -9% return. In Delivery Hero’s case, the company has conversely experienced a continuous upward trend, from -17% to 9% in the last year. The turnaround emerged as the company managed to generate a positive net income of £231million in 2019, the first time this has occurred within the last 5 years. Along with the heightened demand for food delivery in the recent months, net income is forecasted to surpass 2019’s figure, depending on how Covid-19 affects the opening of restaurants. The longer restaurants stay closed, the higher the demand for deliveries and vice versa.
Value measures the reasonableness of a company’s market value, relative to its financial performance. One of the most traditional ratios used to analyse value is the Price to Earnings Ratio (P/E) which is calculated as Market Value, Per Share Divided Earnings, Per Share.
Ocado currently has a negative P/E ratio of -68.13x as the company is losing money and not generating earnings. In February, Ocado revealed a £214million loss as their Andover warehouse caught fire and burned through profits. Despite the huge loss Ocado has managed to successfully form a joint venture with M&S to deliver grocery products from September 2020 onwards, when Ocado’s deal with Waitrose expires. Partnering with M&S will see their product range expand by 50%, whilst offering lower prices and better quality products. M&S paid £750m for half of Ocado’s UK retail business as part of a plan to expand its grocery division, which does not have an online presence, a sign of confidence in Ocado’s business as a whole.The new joint venture combined with the increase in demand for orders this quarter will hopefully turn Ocado’s P/E ratio around.
Delivery Hero on the other hand, is trading at 73.19x as the company is highly profitable and has seen orders double YoY to 239 million, with over 3 million orders per day.
With all the buzz going on about delivery companies, analysts are speculating that the economy is in a bubble and the P/E ratio of companies cannot be used as the only tool for valuation. Our Genuine Impact calculations include metrics such as price to sales, free cash flow yield and dividend yield to paint a clearer picture for long-term investors.
Both Ocado and Delivery Hero’s value (5,000+) are in the bottom 20% of companies world wide, indicating that they are very expensive and are not good entry points for investors right now.
Momentum measures the operating strength of a company compared to market expectations, which are based on sell-side analysts’ forecasts. If a company’s financial results beat market expectations, momentum will rise and vice versa.
As the below chart shows, analysts have revised their forecasts upwards for both Ocado and Delivery Hero’s revenue, within the past 3 months. A possible reason why Ocado’s revenue revision is persuasive, is that analysts may be optimistic that their plan to raise £1 billion (£657 million equity + £350 million debt capital), will accelerate their growth. Essentially, the new funds will be used to increase capacity for existing partners and new clients, by buying new warehousing space and installing new robots to gather orders.
Delivery Hero’s bullish revenue growth revision could be because analysts are confident that the company will be able to beat their 2019 profit of £213 million, as demand for their services have seen an all time high due to COVID-19. The effects from this pandemic will significantly benefit Delivery Hero’s business, as people are still carrying out social-distancing and a second wave is still very much a possibility.
With countries still in lockdown and the frequency of orders for online groceries and food delivery increasing to unprecedented levels, the outlook should be bright for companies like Ocado and Delivery Hero.
In reality, both companies have unappealing quality and value, as shown through our Genuine Impact ranking. Momentum on the other hand is the only outlier among the three metrics and that alone is not a reliable indicator for a long term investor. Sell-side analysts believe that these two companies have potential for growth as Covid-19 is acting as a catalyst. It may be worth considering these two players if an investor is solely looking at a company’s momentum and future partnerships.