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The Swatch Group AG ADR SWGAY

Morningstar Rating
$11.96 +0.20 (1.70%)
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Company Report

Swatch Should Benefit From Chinese Demand Recovery, a Turning Point for Low-Priced Brands

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).

Price vs Fair Value

SWGAY is trading at a 44% discount.
Price
$11.96
Fair Value
$28.90
Uncertainty
Medium
1-Star Price
$96.19
5-Star Price
$46.84
Economic Moat
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Capital Allocation
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Bulls Say, Bears Say

Bulls

Around three quarters of Swatch's revenue and higher share of profits are from higher-end watch and jewellery brands, and is not affected by smartwatch competition. The performance of lower-end brands should stabilize as smartwatches reach adoption maturity.

Bears

Around 50% of demand for Swatch products comes from Asian customer, most notably Chinese, making the company vulnerable to adverse economic shocks and demand changes in the region.

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Trading Information

Previous Close Price
$11.76
Day Range
$11.8011.97
52-Week Range
$11.2418.33
Bid/Ask
$11.81 / $12.01
Market Cap
$62.00 Bil
Volume/Avg
56,034 / 93,963

Key Statistics

Price/Earnings (Normalized)
11.53
Price/Sales
7.37
Dividend Yield (Trailing)
2.80%
Dividend Yield (Forward)
2.80%
Total Yield
2.80%

Company Profile

Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in midrange Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. We estimate that Swatch Group makes about 30% of its sales from Omega, 17% from ultraluxury brands, 20% from Longines, 10% from Tissot, and 6% from Swatch. We estimate Omega and Longines to be the group’s most profitable brands.
Sector
Consumer Cyclical
Industry
Luxury Goods
Stock Style Box
Mid Core
Total Number of Employees
32,899

Competitors

Valuation

Metric
SWGAY
MC
CFR
Price/Earnings (Normalized)
11.5327.8710.79
Price/Book Value
4.646.934.45
Price/Sales
7.374.924.13
Price/Cash Flow
37.0918.4315.28
Price/Earnings
SWGAY
MC
CFR

Financial Strength

Metric
SWGAY
MC
CFR
Quick Ratio
2.520.581.63
Current Ratio
8.461.322.48
Interest Coverage
641.0023.0913.04
Quick Ratio
SWGAY
MC
CFR

Profitability

Metric
SWGAY
MC
CFR
Return on Assets (Normalized)
7.25%11.43%9.68%
Return on Equity (Normalized)
8.47%27.46%20.95%
Return on Invested Capital (Normalized)
8.25%16.81%11.40%
Return on Assets
SWGAY
MC
CFR
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