Company Reports

We are maintaining our fair value estimate for narrow-moat Swatch Group as we incorporate full-year 2023 figures into our forecasts. We believe shares are undervalued at current levels.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, we see a lack of control over distribution (a little less than 60% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which we believe can be damaging for brands with long-shelf-life products. We believe that the demand for high-end watches is not structurally impaired (around 50% of revenue), branded jewellery offers attractive upside for growth (around 9% of revenue from Harry Winston brand), while lower-priced watches (less than 20% of sales) are stabilizing and growing from a low base as the smartwatch category matures and innovation provides a boost. The company is increasingly taking action to tackle costs in the low-end brands and limit grey market channels for high-end brands while investments in automation should help achieve higher profitability even with lower volumes. We expect Swatch Group’s sales to grow at a 4% pace over the long term (versus low-single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet, and Blancpain, high-single-digit growth for jewellery brand Harry Winston and low-single-digit growth for low-end watches (Tissot, Swatch, Mido, Hamilton, and so on).

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, we see a lack of control over distribution (a little less than 60% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which we believe can be damaging for brands with long-shelf-life products. We believe that the demand for high-end watches is not structurally impaired (around 50% of revenue), branded jewellery offers attractive upside for growth (around 8% of revenue from Harry Winston brand), while lower-priced watches (less than 20% of sales) could stabilize from a low base, once smartwatches reach maturity, which we expect to start materializing this year. The company is increasingly taking action to tackle costs in the low-end brands and limit grey market channels for high-end brands while investments in automation should help achieve higher profitability even with lower volumes. We expect Swatch Group’s sales to grow at a 4.5% pace over the long term (versus low-single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet, and Blancpain, high-single-digit growth for jewellery brand Harry Winston and low-single-digit growth for low-end watches (Tissot, Swatch, Mido, Hamilton, and so on).

We expect to increase our CHF 341 fair value estimate for narrow-moat Swatch Group as the company delivered a strong first-half 2023 improvement in sales and profitability. Swatch is among the cheapest companies in our luxury coverage with price/forward earnings of 14 times and around 30% upside to our fair value estimate, trading in 4-star territory. Swatch also has a number of catalysts for outperformance this year.

We don’t expect a material change to our CHF 341 fair value estimate for narrow-moat Swatch Group as the company reported full-year sales a little below our expectations, but recorded better-than-expected profitability. Swatch remains one of the few undervalued names in luxury, trading in 4-star territory.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, we see a lack of control over distribution (around 70% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which we believe can be damaging for brands with long-shelf-life products. We believe that the demand for high-end watches is not structurally impaired (around 50% of revenue), branded jewellery offers attractive upside for growth (around 8% of revenue from Harry Winston brand), while lower-priced watches (less than 20% of sales) could stabilize from a low base, once smartwatches reach maturity, which we expect in 3-4 years’ time based on our Bass analysis and prior technological innovation adoption paths. The company is increasingly taking action to tackle costs in the low-end brands and limit grey market channels for high-end brands while investments in automation should help achieve higher profitability even with lower volumes. We expect Swatch Group’s sales to grow at a 4.6% pace over the long term (versus low -single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet and Blancpain, high-single-digit growth for jewellery brand Harry Winston and flat revenue for low-end watches (Tissot, Swatch, Mido, Hamilton and so on).

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

We are maintaining our fair value estimate of CHF 341 per share for narrow-moat Swatch as the company reported solid improvement in revenue and profits in the first half of the year, even despite lockdowns in China, the company’s major market. Sales were up 7.4% in the first half at constant currencies and would have been 18% higher if CHF 400 million in lost sales due to lockdowns in China were included. Our forecasts call for 4.7% growth in revenue for the full year, implying deceleration in the second half of the year, factoring in some demand cooling from inflationary pressures and weaker asset markets. Management remains sanguine with double-digit local currency growth expected for the remainder of the year. Even so, we view shares of Swatch as inexpensive, trading in 4-star territory with some 45% upside to our fair value estimate.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

We expect to increase our fair value estimate for narrow-moat Swatch by a low- to mid-single-digit percentage following a strong set of full-year results that came above our estimates and outstripped AWP Finanznachrichten consensus in terms of profitability. Swatch remains one of the few relatively attractive names in our coverage, trading at a 10% discount to our fair value estimate, in 3-star territory.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

After a perfect storm in 2020, the luxury industry looks poised for a blue-sky scenario in 2021 as a strong sales rebound is driven by resilient luxury consumers' incomes, steady real estate, and strong equity markets as well as savings from previous coronavirus lockdowns, and the psychological need for people to reward themselves after a stressful time. As a result luxury share prices have rallied, leaving many industry players trading near record levels. Nonetheless, we could not identify structural changes in the industry post-COVID-19 that would justify sustainably higher growth and profitability, and hence, valuations. We believe the pickup in gross domestic product, or GDP, and luxury consumption in the U.S. is temporary. Although we expect Chinese consumers to continue driving the industry's growth, we don't expect post-COVID-19 acceleration, while the "common prosperity" drive by the Chinese government could temporarily hurt the industry through higher taxation and adverse sentiment over conspicuous consumption. Finally, although we expect online luxury sales to reach over 30% of the industry's sales over the next decade from low teens in 2019, we don’t expect this shift to meaningfully alter the industry's economics. Luxury companies are likely to preserve their pricing in the channel, thanks to growing control over distribution and the industry's inherent pricing power. While the online channel for the luxury sector looks more profitable than for mass apparel--thanks to higher average order values and lower return rates--the shift is unlikely to result in a major profit increase for companies that already have high in-store sales densities, such as LVMH's Louis Vuitton. Companies with lower sales densities, such as Hugo Boss, could benefit from the shift as long as they manage their store portfolios proactively.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

In an increasingly expensive luxury sector, we view narrow-moat Swatch Group as one of the few remaining attractive investment opportunities with its solid, cash and precious metal/gem-backed balance sheet and underappreciated opportunities for profitability improvement. We believe that Swatch’s profitability should benefit from continued mix shift toward luxury and high-range watch brands, including Omega and Longines, which we believe to be the most profitable in the group. While we expect basic and mid-range brands (21% of revenue, we estimate) to continue suffering from smartwatch competition over the next 4-5 years before stabilizing at lower levels as smartwatches reach maturity, we think that cost-control measures, such as shift to e-commerce and store closures, should mitigate the impact of those brand revenue declines. Further, investments in automation should help achieve higher profitability even with lower volumes. We believe that Harry Winston brand (8% of revenue) could grow revenue at a low-teens pace over the next 10 years, helped by fundamental drivers for branded jewellery demand (share gains from non-branded alternatives, female self-purchasing, growth in wealth) and strong brand (supported by auction successes, very high end positioning, and control over distribution). We believe Harry Winston’s operating margin could reach mid-teens by 2025 and low-20s by 2030 from below 10% in 2019 thanks to fixed retail cost scaling. Finally, Swatch Group’s balance sheet is strong, precious gem and metal-backed, and delivered free cash flow of almost CHF 700 million even in the 2020 crisis year (representing a 4.9% free cash flow yield).

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

We expect to reduce our fair value estimate for Swatch group by a low-single-digit percentage as we incorporate worse-than-expected 2020 results. We still expect sales to rebound strongly in 2021 when the situation with pandemic normalizes. Swatch’s revenue was down by 28.7% at constant and by 32% at actual exchange rates (versus 25% decline we anticipated), which was weaker than Swiss watch export numbers (down by 21% in value terms in 2020). The company’s exposure to lower priced segments is higher than the industry’s at around 24% of revenue in 2019 versus 10% for the industry in value terms, we estimate. Watches in the industry priced below CHF 500 at export level declined by 34% versus around 20% decline for those priced above this threshold. Weak sales in Switzerland and low levels of e-commerce penetration may also have weighed on the watch performance. Only 5.5% of sales were done with own online channels in 2020 versus 2.6% in 2019 and higher end brands such as Breguet, Blancpain, and Harry Winston don’t have e-commerce, while Omega doesn’t have e-commerce in China.

We maintain our fair value estimate of CHF 310 per share for Swatch Group following a release on Swiss watch exports in November. Export numbers were only 3.2% lower in the month, further improving from a 7% drop in October, bringing the total decline in watch exports from January to November 2020 to 23% in value terms. China led the growth, up 69.5% during the month, a significant acceleration from a 15% increase in October.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

We maintain our fair value estimate of CHF 310 per share for narrow-moat The Swatch Group after the firm reported a 46% drop in revenue and recorded losses in first-half 2020, impacted by the coronavirus. We expect to revise our sales expectations for 2020 slightly downward, but don’t expect it to result in a material FVE change.