Shares in Watches of Switzerland (LSE: WOSG), the luxury watch retailer, have gone up just a little under 150% this year. It appears to be the best performing FTSE 350 share at the time of writing over a one-year period. Looking further back since it joined the stock exchange in 2019, the share price is up 360%.
With such a rapid rise recently, could the form continue into 2022 or has the share had a good run and is due a correction? Is it a growth share worth me backing?
The valuation?
Automatically as a value-focused and often contrarian investor, this share makes me nervous. The rapid share price growth over a short period of time could be a sign of investors getting ahead of themselves. The forward P/E is now 31. The EV-to-EBITDA — which compares the enterprise value to earnings before interest, tax, depreciation and amortisation — is another important valuation metric and it’s 26.1, which is quite high, especially versus other retailers.
Ultimately Watches of Switzerland doesn’t have high barriers to entry as it’s a retailer. Consequently, it needs to spend on marketing and maintaining very strong relationships with its luxury, exclusive suppliers. Potentially this provides some barrier to entry. But not a high enough one for me.
Reasons WoS is a growth share
Despite my reservations, there’s obviously a lot that investors like about this company. The share price is indicative of that. First, there’s strong revenue growth. From 2016 to 2020, revenue went from £410m to £811m and operating profit from £13.1m to £19.8m.
I think what’s really driving the investment case is the growth opportunity in the US. There it has been acquiring complementary businesses to speed up its expansion, while also opening new stores and refurbishing its estate to keep its competitive advantage.
In its 2021 annual report Watches of Switzerland said that it will keep making acquisitions. This should boost earnings and, if done well, can add value. But large acquisitions, as investors will have seen at other companies, can also destroy value. Acquisitions are a double-edged sword. They should be watched carefully.
E-commerce is also a growing part of the business, as it is with almost all retailers. This cheaper method of reaching more customers should improve margins, so I think online expansion has also helped pump up the share price. In 2021, the e-commerce business was up a strong 120.5%, which reflected a more than doubling in the UK and a successful launch in the US.
Stick or twist?
Ultimately I think investing in Watches of Switzerland comes down to whether the US expansion opportunity is big enough to justify the current valuation. US revenue increased by 32.7% (38.5% on a constant currency basis) and the US business made up 33% of the group’s revenue in FY21 (FY20: 27.8%).
For me, this is pretty impressive, but not high enough growth to make me think the shares will keep flying next year. For that reason, I won’t be looking to add the shares to my portfolio. I’d think there are better valued UK retail shares that also have US overseas expansion opportunities.
Watches of Switzerland seems like a good company, so if the valuation came down significantly and US growth rockets, I may be tempted. But I don’t expect the share price to crash any time soon.
Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
