Swatch – Depressed Share Price Due To Uncertainty
|March 29, 2016||Posted by Oddmund Grøtte under Stock Analysis|
Share price today: 330 CHF
I believe Swatch is a well-known brand for most people. They manufacture and sell watches, jewelry, watch movements and components. Its production companies supply movements and components to third-party watchmakers in Switzerland and around the world. Swatch Group is a key player in the manufacture and sale of electronic systems used in watchmaking and other industries. In addition, they are also a leader in sports events timing. Swatch is the worlds largest watchmaking group, and supplies nearly all the components required for the watches sold by its eighteen individual brands
As of now they have the following brands: Breguet, Harry Winston, Blancpain, Glashütte Original, Jaquet Droz, Léon Hatot, Omega, Longines, Rado, Union Glashütte, Tissot, Balmain, Certina, Mido, Hamilton, Calvin Klein watches + jewelry, Swatch, Flik Flak.
Their headquarter is in Switzerland and they are quoted in Zürich as UHR.VX. You can also find them on the OTC-list in the US as SWGAY (quite liquid). They report in CHF.
The company is still controlled by the Hayek familiy. Nicolas Hayek, who came to Switzerland from Lebanon, restructured the Swiss watch industry in the 80s when they suffered a severe crisis, and at the same time Hayek bought a controlling stake of the company. He introduced SWATCH and included “Swiss made” on the bottom of each watch and subsequently doubled the price on the selling price (!). They regained their competitive edge with the Japanese and suddenly SWATCH was an iconic brand. Currently his two children are in charge of the company.
CAGR from 2006 until end of 2015:
|Revenue CHF Mil||5.775748|
|Gross Margin %||-0.05227|
|Operating Income CHF Mil||4.077166|
|Operating Margin %||-1.59488|
|Net Income CHF Mil||2.790324|
|Earnings Per Share CHF||3.339594|
|Operating Cash Flow CHF Mil||4.734915|
|Cap Spending CHF Mil||8.966048|
|Free Cash Flow CHF Mil||2.172252|
|Working Capital CHF Mil||6.776813|
The numbers are good, but small growth. Worth noting is the falling margins which is a concern.
On average 7.4% of turnover is turned into free cashflow.
In 2015 sales went down 3%, in local currency 0.9% down.
ROIC is a respectable 14% over the last 10 year period. Anything above 10% is very good.
January 2016 confirms that particularly mainland China watch consumption rose strongly compared to last year, which is the reason why Swatch expects 2016 to produce 5% growth in local currency. However, seems like the market does not believe the management as the share price has not moved.
Balance sheet analysis:
Liabilities is just above 15% of total assets, very low by any standard. Excess cash is about 53 CHF per share, very high for such a multinational company. The company is managed in a very conservative way.
They have decided to buy back shares for 1 bn CHF until February 2019. Market cap is now around 18 bn CHF so this equals about 5% of the company.
The company has paid a dividend for at least 10 years. Dividend for 2015 is 7.5 CHF which equals 2.2% at todays share price. As far as I know they have no formal dividend policy. Payout ratio is still low:
Share price today: 330 CHF
Last years results and todays price give a PE of 15. P/FCF is a bit higher with 17. Of course, relative to market this is pretty cheap. Here is chart with its historical valuation:
The PE of 10 happened during the crisis of 2008. Excluding that we see that the stock sell slightly on the cheap side, however, not a huge discount. Adjusting for the excess cash the stock trades at PE of 13. Based on that the stock looks cheap, but now trading at a discount due to factors described underneath in key risks. I own Swatch shares, mainly because I believe sales will pick up again.
Swatch is an innovative company, but todays share price is influenced by the threat of smart phones which have eaten into their sales, also the Apple Watch.
Part of the company’s strategy is to focus on developed markets. China, the biggest market for luxury watches, has slowing growth. Any hiccups in china have quite big impact on sales.
I have shares in Swatch.
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