Ocado’s big challenge, good news for BP and sales setback for Babcock

“Global stock markets continue to fall sharply with the FTSE 100 down a further 2.6% to 7,148 in early trading on Tuesday,” says AJ Bell Investment Director Russ Mould.

Ocado

“Ocado says the last 12 months have been ‘transformational’ for the business after winning overseas partnerships. But the performance statistics don’t quite live up to the hype. It is making barely any profit, active customer numbers are going up but the average basket value is going down.

“It is burning through cash and investors still don’t know whether the international deals announced over the past year will have a material impact on its earnings.

“You could argue it has to spend money to make money in the future, but shareholders have already been waiting patiently for years while it tries to build scale. Recent deal wins may keep investors happy for a bit longer, but this situation can’t go on forever.

“For a company of its size, it is imperative that Ocado starts winning more partnership deals and makes a decent profit, otherwise investors will eventually shop elsewhere for a better food retailer.”

BP

“Oil major BP beat expectations for the fourth quarter, posting underlying replacement cost profit of $2.1bn against consensus at $1.9bn. However, this performance was somewhat overshadowed by a $1.7bn charge associated with the Gulf of Mexico and other impairments – mainly relating to the impact of US tax reforms.

“A material improvement in cash flow was a notable feature of the results, up nearly 40% year-on-year for 2017 as a whole at $24.1bn. This is significant as it has implications for the sustainability of BP’s prized dividend payments.

“It was also interesting to note that the firm delivered ‘very strong’ earnings in its downstream or refining operations which set it apart from rivals like Royal Dutch Shell and ExxonMobil which saw their downstream arms underperform in the final three months of last year.”

Babcock

“Engineering outsourcer Babcock points to weaker than expected sales in the year to 21 March 2018 but this is balanced out by better margins which helps keep profit and cash flow on track to hit expectations.

“There is some reassurance for investors as the company says it will not be impacted by the IFRS 15 changes to accounting rules thanks to its existing ‘conservative’ approach.

“Looking forward, the company has nudged up its contract pipeline from £12bn to £12.5bn. A key risk for investors in the stock is the company’s heavy exposure to Ministry of Defence spend. It is the second largest supplier to the MoD with some 292 contracts currently in place.”

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