Intro
Having
written about a few smaller companies recently, this blog entry talks about a
major firm – a Swiss blue chip. Swatch is the number one producer of watches in
the world and produces nearly all of the components for its 18 watch brands in
house. The brands include names in different price segments such as Harry
Winston, Swatch, Breguet, Omega, Longines and Rado.
Some
uncertainty in Hong Kong (political turmoil, protests), the spreading of a new
virus (COVID-19), provisional measures adopted by the Competition Commission and
possible risk of smartwatches have weighted heavily on the stock price, which
trades on the lowest levels since 2009 – albeit the operational performance has
been very acceptable.
Valuation
In the last
four years, Swatch was able to increase its sales from CHF 7.5 billion to more
than CHF 8.2 billion; operating profit (margins between 10.7-13.6%) and net
income have seen even bigger boosts. For 2019, net income is around CHF 750
million, which reflects a currently depressed P/E of approx. 14x.
The balance
sheet is just pristine: as of 2019, Swatch shows financial debt of only CHF 120
million, while total assets are worth more than CHF 13.6 billion. It is fair to
say that this company would be in a position to absorb a potential market
downturn easily, even for an extended time horizon. Buying a pretty much debt
free company like Swatch at a P/B of 0.93x with a long term track record is
rather cheap and provides a fair margin of safety.
What’s
next?
For 2020,
Swatch initially expected healthy growth in all markets in local currency,
except in Hong Kong – we’ll see if that is still possible after COVID-19. Many
things are quite negative when looking at Swatch at the moment – as always,
times will change and Swatch will still be around to hopefully receive the full
valuation as it deserves.
Current
Price
CHF 40.16
per registered share
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