Compass v Ocado proves bottom-line profits and dividends still matter | Nils Pratley

Imagine that on the first day of 2020 you had magically been granted insight into the size and commercial impact of the coming Covid pandemic. From 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 set to be clobbered as offices and schools closed their canteens? Or would you have opted for Ocado, an online retailer with world-leading technology that was about to enjoy a whoosh of demand from locked-down shoppers?

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

Over at Ocado, the share price more than doubled between March and September 2020. The company also raised fresh capital – £1bn worth – but its motive was to capitalise on the many online opportunities that were opening up. “The current crisis is proving a catalyst for permanent and significant acceleration in channel shift globally,” declared its chief executive, Tim Steiner, when tapping shareholders and bondholders in June that year.

And now? It turns out that, if your were obliged to hold your investment until now, you were better off backing boring Compass. From 1 January 2020, you’d now be down about 11%. Ocado, after its enormous hurrah, has given up all its gains and then some. From £12.73, the shares went as high as £28.95 and are now 764p. So Ocado is down 40% from the starting line.

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What happened? The Compass half of the tale was explained via Wednesday’s forecast-beating first-half set of numbers. Students are back, sports events are happening again and office workers have returned in sufficient numbers to make working-from-home factors almost irrelevant. Revenues were 90% of pre-pandemic levels.

Inflation in food prices could become a problem, but Compass thinks more firms may be prompted to outsource their catering to save money and dodge the hassles of post-Covid hygiene requirements. Pre-tax profits were £632m in the half-year and the group boosted its forecast of revenue growth this year to 30%. The rebound from lockdown conditions has been rapid.

At Ocado, recent noises have been far from bullish. In place of the predicted “permanent and significant” shift towards online, the group in March warned about a “return to pre-Covid shopping patterns”. It also fretted about inflation, the cost of living crisis and increases in energy costs, none of which contained a silver lining in its case.

The company still has its long-term licensing deals to sell its kit and grocery-picking expertise to overseas supermarket groups but, say the sceptics, the pandemic really demonstrated the inflexibility of the warehouse model. Supply could not be ramped up quickly to meet the surge in demand. The great market opportunity slipped away.

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

One old moral of the tale is that hard bottom-line profits and dividends, which Compass, Sainsbury’s and Tesco have but Ocado doesn’t, 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 so simple. The reversal described here is just a miniature version of the more dramatic tech sell-off in the US, but it has had a feel of inevitability for a while.