Many investors may say the clock may be ticking on Watches of Switzerland (LSE:WOSG) shares as an attractive investment. This luxury watch retailer has seen its share price plummet nearly 38% over the past year, significantly underperforming both its industry peers and the broader UK market. But does this present a golden opportunity for savvy investors? Let’s take a closer look.
Out of time?
The company operates as a retailer of luxury watches and jewellery in the UK, Europe, and the US. While the business boasts an impressive heritage dating back to 1775, its recent performance has been less than stellar.
The firm’s profit margins have taken a significant hit, dropping from 7.9% last year to just 3.8% in the most recent report. This compression in profitability is a red flag that shouldn’t be ignored. Additionally, the company’s share price has shown high volatility, falling a massive 37% in a single day back in January after releasing a profit warning.
Most worrying for me, a discounted cash flow (DCF) analysis suggests the company is already overvalued by an incredible 287%. This is admittedly just one metric, but with investors already down significantly for the year, I’d be nervous about further difficulties ahead.
Signs of optimism
However, it’s not all bad news for Watches of Switzerland. The company’s price-to-earnings (P/E) ratio of 16.3 times is slightly below the UK market average of 16.7 times, suggesting it may be trading at a fair value compared to its peers. Furthermore, analysts are forecasting healthy earnings growth of 17.35% per year.
The company also appears to be in good financial health, with more cash than debt. This solid foundation could help the firm weather short-term storms and position itself for future growth.
The analyst community seems divided on Watches of Switzerland’s prospects. The shares currently have a ‘moderate buy’ consensus rating, based on 6 ‘buy’ ratings and 3 ‘hold’ ratings from analysts over the past three months. The average price target of 486.38p represents a potential growth of nearly 18% from the current share price.
However, it’s worth noting that some analysts have recently lowered their price targets. Bank of America Securities, for instance, reduced their target from 700p to 650p while maintaining a ‘hold’ rating.
One to watch
So, is time up for Watches of Switzerland shares? While the company faces significant challenges, including compressed margins and a challenging macroeconomic environment, it’s perhaps too soon to call time on this luxury retailer.
Despite some mixed ratings and valuations, the firm’s strong balance sheet and projected earnings growth suggest there may still be life in the old timepiece yet. However, potential investors should be aware of the risks, including the company’s recent underperformance and share price volatility.
So while the Watches of Switzerland share price may still have some ticks left in it, only time will tell if it can regain its lustre as a standout investment in the UK market. I’ll be adding it to my watchlist for now.
This post was originally published on Motley Fool
