Recently, I was scanning the FTSE 250 index for attractive value stocks. And one business stood out to me.
This company is growing at a healthy rate right now. Yet this year, its share price is down around 25%.
Value on offer
The company I’m talking about is Watches of Switzerland Group (LSE: WOSG). It’s a luxury watch and jewellery retailer that sells brands such as Rolex, Omega, and TAG Heuer, and has operations in a number of countries.
Now, I must admit that I haven’t always been bullish on this stock. When it was trading near 1,500p a few years ago, I was actually pretty bearish on it as I thought it was overvalued.
However, after its big fall recently, it’s a different story. At its current share price of 616p, I see quite a bit of value on offer here.
From an investment perspective, this company has a lot going for it.
For starters, it operates in a growing industry. In recent years, interest in luxury watches has exploded due to social media and the fact that people had a lot of disposable income during Covid.
And the market is projected to grow at a healthy rate in the years ahead. According to Grand View Research, the global luxury watch market is forecast to grow at an annualised rate of about 5% per year between now and 2030.
Second, the company has a growth strategy in place. Earlier this month, it said that it plans to more than double its revenue and annual profit by fiscal year 2028 as it grows its US presence and expands into pre-owned watches and luxury branded jewellery.
This financial year, it expects revenue growth of 8-11% at constant currency.
Third, it’s quite a profitable business. Over the last five years, return on capital employed (ROCE) has averaged 13.2%. Companies that generate a high ROCE tend to get much bigger over time.
Low P/E ratio
Now, normally a company with this kind of growth and profitability might command a price-to-earnings (P/E) ratio of somewhere around 15.
However, at present, Watches of Switzerland’s P/E ratio is just 12 (falling to around 10.5 using next financial year’s earnings forecast).
At those earnings multiples, I think the stock is undervalued.
And it seems analysts at Barclays share my view. They currently have a price target of 1,035p – nearly 70% above the current share price.
Risks to consider
Of course, the big risk here is a further deterioration in consumer spending. Luxury watches are very much a discretionary purchase.
A second risk is Rolex’s recent move to buy Bucherer. This adds some uncertainty as the brand (which is the biggest luxury watch brand in the world by revenue by a mile) could potentially move into retail itself and cut out retailers like Watches of Switzerland.
At a P/E ratio of around 12, however, I see a decent margin of safety here. At that earnings multiple, I think the stock is worth a closer look.