One of the unsung stars of the FTSE 250 index since the 2020 stock market crash is surely Watches of Switzerland (LSE: WOSG). Trading around the 180p level back then, its share price has since soared 250% to 640p by yesterday. Let’s look at why and whether I’d buy it.
FTSE 250 star
December’s interim results — covering the 26 weeks of trading to 25 October — were certainly encouraging.
Despite 2020 being such a tough year for most businesses, WOSG still managed to generate a little over £414m in revenue. In reported terms, this represented a decline of 3.4%. That’s not ideal but it’s far from disastrous considering the impact of the coronavirus on airport and tourist sales. The reduction of trading hours didn’t help either.
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Statutory pre-tax profit for the FTSE 250 business rose to £36.2m over the period compared to a loss of £9m in 2019. No wonder management was keen to describe this performance as “robust“.
Can this continue?
Quite possibly. Moving into Q3, WOSG said trading in had been “stronger than anticipated” despite ongoing coronavirus restrictions and the second national lockdown in England. Reported revenue for the seven weeks to 13 October was up 11.2%. Perhaps unsurprisingly, online sales over the period more than doubled.
As a result of all this, WOSG increased its guidance on full-year revenue to somewhere between £900m and £925m. It was originally in the region of £880m-£910m. Importantly, this guidance even assumed “some further negative trading impact from potential lockdown measures in January and February 2021.” Just as well.
Taking the above into account, the performance of Watches of Switzerland’s share price makes sense. Should I be joining the queue to buy the stock?
Why I’m tempted
Aside from recent trading, there are a few reasons why Watches of Switzerland catches the eye. It’s the market leader in the UK and is quickly growing a presence across the pond. Indeed, the firm acquired Analog Shift — a US retailer of pre-owned and vintage watches — to support this strategy.
In addition to earnings becoming increasingly geographically diversified, WOSG also sees no material impact of Brexit on its supply chain. Moreover, the market for brands such as Rolex and Patek Philippe tends to be resilient, even through tough economic times.
Another thing I really like is that the £1.6bn-cap is taking big steps to strengthen its balance sheet. Back in December, it said net debt at the end of its financial year would be between £60m and £80m. This is lower than previously thought.
What’s not to like?
Well, the valuation is pretty high. If I wanted to buy WOSG today, I’d need to pay the equivalent of 28 times forecast FY21 earnings. Having said this, a PEG (price/earnings to growth) ratio is around 1.2. A number this low is usually indicative of investors getting a good deal. So, perhaps the price isn’t all that steep after all?
Nonetheless, the are other things that don’t quite hit the mark. Returns on capital employed — one of Terry Smith’s favourite ways of identifying quality companies — are pretty average. Margins aren’t exactly high either. The lack of dividends, while understandable for a growth stock, also needs to be considered.
On balance, I’m keeping this FTSE 250 on my watchlist for now. Should another period of market mayhem occur in 2021, I may need to get involved.
