The strong rally in tech stocks has left Ocado’s valuation “implying an implausible flow of new customers”, with analysts noting that the company’s Solutions arm, where the vast majority of its valuation lies, has not signed any new deals this year.
They also see a number of negative catalysts, including US and UK lawsuits filed by Norwegian robot company Autostore; expected online grocery solutions competition such as Carrefour’s recent deal with Food-X Technologies, plus a number of micro-fulfilment centres in the process of being commissioned in the UK and other markets.
“Thirdly, Ocado has been a major beneficiary of the rally in tech stocks. While share prices in the tech sector may remain strong – and could conceivably even go higher – if this was not the case then Ocado might struggle to resist the downwards pressure.”
Barclays is also giving the side-eye to Meggitt, given weakening market data for flight hours and travel traffic “from the growing likelihood of a Covid second wave”, with industry data later this month or early next expected to dampen sentiment, with a trading update on November 10 that could see the resumption of guidance.
As for the positive catalysts, in order of potential share price upside, the bank flagged up OneSavingsBank PLC (LON:OSB), British American Tobacco PLC (LON:BATS), Intermediate Capital Group PLC (LON:ICP), J Sainsbury PLC (LON:SBRY), WPP PLC (LON:WPP), National Grid PLC (LON:NG.) and Hikma Pharmaceuticals PLC (LON:HIK).
OSB, the analysts think, “could be at the beginning of a multi-quarter earnings upgrade cycle”, starting with a trading update on November 10 that “should confirm strong loan growth, and a strong year-end pipeline”. A price target of 420p offers over 40% potential upside.
On BAT, following a strong US performance in the first half on both volume and pricing, the bank’s tobacco analysts expect strength in the US business to continue in the second half, while the US election outcome is significant for the share price. The target price of 3,800p offers over 30% potential upside.
On ICG, interim results on November 17 are predicted to “offer visibility over key performance metrics, which could be a catalyst for confirming the longer-term investment case and reversing some of the recent underperformance”. Barclays price target of 1,570p offers over 20% potential upside.
At Sainsbury’s, the “main attraction” is a strong underlying free cash flow and while firework are not anticipated in interim results on November 5, they are expected to show “elevated grocery sales, potential outperformance from the Argos division and a strategy update from new CEO Simon Roberts”. A 250p target offers around 20% potential upside.
Over at WPP, where shares are down 38% since the start of the year, an investor day in the next months or two “could be a positive catalyst, as we are hopeful management will provide more colour on net sales breakdown, margins and capital allocation”. The target price is 800p, also offering over 20% upside
For National Grid, the utilities team expect regulator Ofgem’s final determination in December to “outline more favourable conditions compared to July’s draft determination and our upside case could lead to a significant re-rating”. National Grid’s target price is 1,050p, offering about 10% upside.
Hikma was upgraded by Barclays last month on the belief that there is greater visibility into sustained revenue and earnings growth for all three of the company’s business segments and, should its generic version of heart disease drug Vascepa be launched prior to the November 5 trading update, “we see possible upgrades to FY20 guidance”. The target is 2,800p, which does not offer huge upside, though an “upside case” price target of 3,200p.