Compass v Ocado proves net profits and dividends still matter | Nils Pratley


IImagine that on the first day of 2020, you were magically given a glimpse of the size and business impact of the coming Covid pandemic. In this shortlist of two food-related companies in the FTSE 100 index, would you have chosen to make a ‘forever’ investment in Compass Group, a contract caterer that is set to take a hit as offices and schools were closing their canteens? Or would you have opted for Ocado, an online retailer with cutting-edge technology that was about to enjoy strong demand from stranded shoppers?

For the first 12 months of this race, the winner seemed blindingly obvious. Compass’s share price halved in anticipation of a drop in annual operating profits that turned out to be as bad as expected – 82%. The group had to raise £2bn of fresh equity to bolster its finances.

At Ocado, the share price more than doubled between March and September 2020. The company also raised new capital – worth £1bn – but its motive was to capitalize on the many opportunities in line that opened. “The current crisis is proving to be a catalyst for a permanent and significant acceleration of channel shifting globally,” its chief executive, Tim Steiner, said at the June shareholder and bondholder solicitation. .

And now? Turns out, if you were forced to keep your investment so far, you better support boring Compass. As of January 1, 2020, you would now be down about 11%. Ocado, after his huge hurrah, gave up all of his winnings and more. From £12.73 the shares rose to £28.95 and are now 764p. Ocado is therefore down 40% from the starting line.

What happened? The Compass half of the story was explained via the first-half set of numbers that beat Wednesday’s forecast. Students are back, sporting events are recurring, and office workers have returned in sufficient numbers to make work-from-home factors almost irrelevant. Revenues were 90% of pre-pandemic levels.

Food price inflation could become a problem, but Compass thinks more businesses could be encouraged to outsource their catering to save money and avoid the hassle of post-Covid hygiene requirements. Pre-tax profits were £632m in the half and the group raised its revenue growth forecast this year to 30%. The rebound in confinement conditions was rapid.

At Ocado, recent noises have been far from bullish. Instead of the planned “permanent and significant” shift to online, the group warned in March of a “return to pre-Covid shopping habits”. He also worried about inflation, the cost of living crisis and rising energy costs, none of which contained a bright side.

The company still has its long-term licensing deals to sell its kit and grocery pick-up expertise to overseas supermarket groups but, say skeptics, the pandemic has really demonstrated the inflexibility of the business model. warehouse. The supply could not be increased quickly to meet the increase in demand. The big market opportunity has slipped away.

Don’t discount Ocado for the very long term, but the focus should probably be on the ‘very’. It now seems absurd that the company was briefly worth more than the mighty Tesco when its stock market value hit £21.7bn in September 2020. At £5.8bn today, Ocado is now only a hair ahead of the UK’s second largest supermarket group, Sainsbury’s. (£5.4 billion).

An old moral of the story is that net profits and dividends, which Compass, Sainsbury’s and Tesco have, but not Ocado, still matter. Another is that the stock market has a terrible habit of jumping on short-term trends and assuming they will last forever. Life is rarely that simple. The reversal depicted here is just a miniature version of the most dramatic tech sellout in the United States, but it has had a sense of inevitability for a while.

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