Having fallen 15% in a month, are these two UK shares now dirt-cheap?

Portrait of worried woman standing beside window
Portrait of worried woman standing beside window

At the time of writing, Ocado (LSE:OCDO) and BT (LSE:BT.A) have fallen by 29% and 15%, respectively, this month. Yet, these two UK shares are very different.

What are they?

Ocado describes itself as “the biggest grocery retailer of its kind in the world”, and hopes to take advantage of the long-term trend towards online shopping. Its Ocado Retail business is a joint venture with Marks and Spencer. Ocado says it has over 800,000 active customers.

BT claims to be “supporting customers to live, work and play together better”. Its consumer division boasts of 30m mobile and fixed broadband customers in the UK. BT also has another 1.2m business users.

What about their financial performance?

Ocado announced a loss before tax of £211m in its half-year results published in July, compared to BT’s profit of £482m in the three months to June.

Ocado has never paid a dividend.

Since it floated in 1984, with the exception of one year due to the pandemic, BT has always declared a dividend. BT’s yield is currently nearly 6% — well above the FTSE 100 forward-looking average of 4.1%.

Ocado reported revenue of £1.3bn in the 26 weeks to 29 May 2022, down 4% compared to a year ago. The company moved from a net cash position of £189m at May 2021, to having a net debt of £759m 12 months later — a swing of £948m.

BT’s sales rose by 1% to £5.1bn in the three months to June 2022, and its net debt increased by £325m compared to a year earlier.

Are they dirt-cheap?

So, are either of these shares dirt-cheap?

Ocado and BT have come onto my radar because of the recent dramatic fall in their share prices. But what is their underlying value?

Warren Buffett once said: “Price is what you pay. Value is what you get.”

A company can be valued based on either its assets or its future expected cash flows.

Ocado has only made a profit three times in 22 years, making it difficult to assess its earnings potential. Ocado’s current market cap is roughly three times that of its net assets of £1.6bn. To my surprise, Ocado has a stock market valuation equal to that of J Sainsbury.

BT has a track record of profitability. It’s current price-to-earnings ratio is seven, and is much lower than its FTSE 100 peers. BT had net assets of £15.3bn at the end of March, approximately 18% above its market cap.

Who wins?

So, if I had to choose between these two shares, BT would win hands down.

I am not alone.

French billionaire Patrick Drahi appears to see potential in the telecoms giant, having quietly increased his stake to over 18% in recent months. Furthermore, the UK government has waived its previous objection — on grounds of national security — to Drahi’s interest.

But, I am not going to invest in either Ocado or BT at the moment.

It doesn’t seem right to me that Ocado is valued more like a tech stock than a retailer.

As for BT, I think its current market cap reflects concerns over its growth potential. BT has significant market penetration, and the current squeeze on disposable incomes will affect its ability to increase revenues further.

The post Having fallen 15% in a month, are these two UK shares now dirt-cheap? appeared first on The Motley Fool UK.

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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and Sainsbury (J). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022