Is it finally worth shopping for Ocado shares?

Marks & Spencer admitted last week it would trial an online grocery shopping service this autumn to exploit the success of its growing food business. Its best brains were cooking up a plan, said chief executive Steve Rowe. Seems they work quickly at M&S HQ, as rumours over the weekend have Marks negotiating a supply deal with delivery expert Ocado.

Now, Ocado is a company that we've not covered in any great detail before, primarily as we've struggled to identify a sensible investment angle.

Peaking at over 600p in 2014, the share price halved over the next six months and has been volatile in a downward trend ever since. Talk of a bid from Amazon came to nothing, serving only to fill the pockets of hedge funds who made millions shorting the stock.

In fact, it was Amazon's success in winning a delivery contract with Morrisons, with whom Ocado already had a deal – it was signed in in 2013 and renegotiated last year – that kicked Ocado shares deeper into the mire in November.

Even results fail to pique the market's interest, with costs rising and investors more focused on Ocado's ability to sell its technology solution to international retailers, or perhaps someone closer to home.

That obsession with further logistics deals was evident Tuesday morning when Ocado shares surged as much as 10% to their highest since mid-January.

According to reports in the weekend's Telegraph, insiders say talks with M&S about running the high street retailer's foray into food home delivery will begin in "the coming weeks".

"A supply agreement similar to the Morrisons/Amazon deal is the best case scenario for both companies," argue Stewart McGuire and Pradeep Pratti, analysts at Credit Suisse.

"M&S's range is too narrow and its basket size too small to offer a credible standalone online grocery service," they explain. "A 'white label' deal (like Morrisons) does not make sense to us. However, listing M&S products on Ocado's website does.

"Assuming a supply agreement approach, we would expect Ocado to see volume growth after filling the only mass-market product gap in its offering. For M&S, it might be better for sentiment than its financials as we would assume 25-50% of online sales would be cannibalised from stores, and the split with Ocado would reduce margins below 33% retail gross margin."

Sealing a deal with M&S would certainly be a huge boon for Ocado - might Stuart Rose, the former M&S CEO now chairman at Ocado, grease the wheels here? Given the complicated nature of any agreement, the exact financial benefit is also unclear.

However, it would need to be stellar to improve the look of Ocado's numbers. Adjusted earnings per share (EPS) are tipped by Credit Suisse to come in at just 2.03p in 2017, then 3.09p next year and 5.45p in 2019. Even using that final figure, the shares currently trade on an eye-popping forward price/earnings (PE) ratio of 48.

Remember, too, these are ambitious estimates. Many others, including Goldman Sachs, anticipate far less. Don't expect a dividend for years either.

That said, for the brave, Goldman repeated its 440p price target following Ocado's first-quarter results in March – it values Ocado.com and the Morrisons contract at 415p a share.

Despite reducing its 2017 forecast for cash profit – a key metric used to value Ocado - by 13% to £95 million, Credit Suisse has been tipping the shares up to 410p.

Look for further easing in basket deflation easing and further volume growth.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.