HSBC initiates coverage of On Holding, maintains "hold" rating

Investing.com -- Analysts at HSBC initiated coverage of On Holding (NYSE:ONON ) with a "hold" rating, with a target price of $52, one of the highest on the street. 

While the Swiss performance sportswear company has been seeing a global surge in sales, HSBC analysts have indicated that the risk-reward ratio for the company is not compelling at present​.

On Holding has experienced notable global growth, particularly within the sports footwear market, driven by its distinctive brand positioning and product innovation. 

The company has broadened its market presence through several product launches and the opening of new stores. 

This growth has positioned it as a player in the global sporting goods industry, though its market share in China remains relatively smaller compared to local competitors.

HSBC’s decision to initiate coverage of On Holding aligns with a broader outlook on the sporting goods sector. 

The sector, after facing challenges such as excess inventories, cost pressures, and post-COVID-19 exuberance, has stabilized due to improved inventory management and favorable foreign exchange conditions. 

The resurgence of sporting events like the UEFA European Football Championship and the upcoming Paris Olympic Games has also contributed to a positive momentum in the industry​.

HSBC's analysts highlighted that the sporting goods market presents varied dynamics, and not all companies are equally positioned to take advantage of the recent improvements in the macroeconomic environment. 

“We favour adidas, lululemon (NASDAQ:LULU ) and Amer Sports (all Buy) while we maintain Hold ratings on Puma and Nike (NYSE:NKE ),” the analysts said.

The analysts mentioned that although On Holding continues to enjoy a surge in sales, much of the positive developments are already priced into the stock, reducing its short-term upside potential. 

In the first half of 2024, the company managed to gain market share globally, contributing positively to the industry’s growth. 

Despite On Holding's recent growth, HSBC anticipates that its sales momentum may encounter challenges in the near term due to broader industry factors.

HSBC’s forecast for On Holding shows optimism in its long-term growth prospects. The analysts project that On Holding’s sales will grow from CHF 2.3 billion in 2024 to CHF 3.8 billion by 2026, representing a robust growth trajectory. 

However, the company's high valuation multiples—particularly its price-to-earnings (PE) ratio of 44x for 2024 and 39.6x for 2025—suggest that much of the expected growth is already reflected in its stock price.

Moreover, the company’s profit margins are expected to improve steadily over the next few years. 

HSBC analysts took a more constructive view on the sporting goods sector in 2024 compared to six months earlier, due to favorable inventory levels, the impact of major sporting events, and positive foreign exchange movements.

Despite these overall improvements, HSBC stressed that not all companies are equally poised to benefit in the short term. 

On Holding, while reported strong sales growth, faces stiff competition from both global brands like Adidas (OTC:ADDYY ) and Nike, and local Chinese brands such as Anta and Li Ning in the critical Chinese market.

Within the broader competitive landscape, On Holding has carved out a niche, particularly in premium sports footwear. 

Source: Investing.com