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Thursday, Swiss Watches Group (LSE:WOSG) shares tumbled after shares missed earnings estimates. However, the Braunstone-based company maintained its guidance for the year, highlighting strong demand and a 17% increase in revenue.
So let’s take a closer look at Swiss Watches and their meteoric rise in recent years.
Growth above the index
Swiss Watches has not only provided shareholders with above-index growth over the last three years, it has skyrocketed. Demand for luxury watches has skyrocketed, with wait times for certain watches stretching into decades, and Swiss Watches has been a net beneficiary.
So if you had bought £100 worth of Watches of Switzerland shares three years ago, you would have an impressive £257 today. That’s a whopping 157% increase.
And it’s interesting to note that over the past year, I would have actually seen the value of my investment fall. The stock has lost 18% of its value in 12 months, including about 10% on Thursday after the third-quarter results were released.
Valuation
Watches of Switzerland is trading at an earnings multiple of 23. That’s not cheap, but it clearly reflects investors’ belief in the company’s ability to continue to grow the business.
Luxury watches have continued to benefit from a strong demand environment, while growth has been driven by increases in average selling price and volume.
Despite the fact that the share price fell over the past year, the business has continued to grow. Watches of Switzerland said on Thursday that third-quarter revenue rose 17% from the same period a year earlier, to £407m, while revenue for the nine months to January 29 was up 25%. high, at £1.17 billion.
As such, we’re looking at a forward price-earnings ratio of around 18, which is actually in line with the consumer discretionary average.
My worries
I like my watches, although I wouldn’t go as far as calling myself a collector. I’ve been to luxury watch meetups in London and I’ve been to store openings, just the brands I follow. So, I feel like I know the industry pretty well.
My main concern is how much more the Watches of Switzerland business can grow. Clearly supply is struggling to keep up with demand – it’s taken a family member five years to get to no. 2 in the queue for a certain Rolex. And that’s the most mass-produced brand in Switzerland: in 2021, it accounted for around a quarter of Swiss production.
But these Swiss watchmakers don’t necessarily want to increase supply in line with demand, because scarcity is part of the brand’s value. That is especially the case for higher margin watches sold by Watches of Switzerland. I don’t see exponential growth in sales volume for Pateks, Vacheron Constantins or Panerais. And it makes sense. If Panerai were more mainstream, I probably wouldn’t be as interested in the brand.
Similarly, we should keep in mind that the economic environment is unlikely to support continued price inflation. There are a host of economic terms we can use to analyze watch sales, but my general belief is that demand will fall at a time when real wages are falling.
So would you buy these shares? No, it’s not for me. I just don’t think the current growth rate is sustainable and this will eventually disappoint investors. Plus, there’s no dividend yield to soften the blow.
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