Swatch Earnings: Timing Is Right as Sales and Earnings Tick Up

Narrow-moat Swatch Group UHR/SWGAY 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.

First, its exposure to China is among the highest in our coverage (32% of revenue even during lockdowns in 2022, 42% in 2021 for greater China) resulting in the disproportionate benefits from a discontinuation of COVID-19 restrictions in this market. Second, we expect an inflection point in its low-priced brand performance as we believe that 10 years into its existence, smartwatches are close to full adoption, providing less of a competitive drag, while innovation (such as MoonSwatch) helps spur sales. A case in point: in first-half 2023, Swatch recorded its strongest growth in the lower-priced segments. Last, we believe that the company has streamlined its cost structure and invested in automation, which should bode well for profitability as sales recover. The operating margin reached 17.1% in first-half 2023 (15.6% consensus estimates compiled by AWP Finanznachrichten, a Swiss business news agency), a 320-basis-point expansion from the prior year as sales grew by 11.3% at actual currencies (18% constant currencies). Margin expansion is particularly remarkable given a strong currency headwind and its Swiss-based manufacturing costs. Our long-term forecasts called for a high-teens margin for Swatch, which we now expect will be brought forward by a few years. Investments remained disciplined in the first half with inventories up 4.6% and its employee count up 2.6%.