Swatch group: luxury is cheap

But it may be dead for a while

In this article I will summarize two investor thesis published in video format in French and German, and will add my perspective.

In lights of recent results, It seems that the equity value is not very well protected on the downside, and that there is maybe a storm coming into luxury and customer discretionary. Therefore, I changed my mind, and in full transparency, I publish the article and update.

History

The Swatch group is a Swiss family business that is active in the mass market and the luxury watch brands.

The company was established as a consequence of the quartz watch crisis in the 80s, where Japanese brands broke the technological advantage of Swiss mechanical watches brands and caused declines in Swiss watches sales-

It was born from the fusion of two large Swiss watches groups: ASUAG, 1931 (Longines, Rado) ; et la SSIH, 1930 (Omega, Tissot, Lemania Watch).

It was founded by Nicolas G. Hayek (1928-2010), a Lebanese business man.

The iconic Swatch brand was not invented by Hayek however, but by a team of engineers under the direction of Ernst Thomke, then President of ASUAG.

This was a giant success, because it was affordable, design and fun.

In the 90s there were acquisitions:

Then Breguet was acquired in 1999.

In the 2000s, there were more acquisitions with Jaquet Droz, Glashütte Original, and Union Glashütte, as well as the creation of companies doing retail (Tourbillon) or component manufacturing for the group.

In 2003, the Son of Nicolas G. Hayek, Nick Hayek, takes over as CEO

In 2013 the company expanded into Jewelry with the purchase of fine jewelry and watch brand Harry Winston.

During the 2000s and 2010s, the company has also pushed forward with technology subsidiaries and innovation in the electronic components, materials and battery domains

Business

The company does not reveal the breakdown between the different brands, between luxury and mass market. Many analysts describe the business breakdown as over 90% luxury, but the CEO has been seen publicly laughing at these estimations as being very wrong. So in reality, we don’t really know what is the breakdown between luxury brands and mass market (Swatch brand).

Management:

Nick Hayek is CEO since 2003, and the company is controlled by the Hayek family. They are very particular in the fact that they are very long term oriented and refuse to take any debt. Swatch has no debt, refuses to take any because they don’t want to depend on any banks.

He is very long term focused, and had some heavy fights with analysts who wanted more information on sales breakdown, on returns on investments, and came across as rude and arrogant. We have to understand this when buying Swatch shares. Being 69 and a heavy cigar smoker, he may not be around for too long and retire.

To give him a fair shot, he ran the company with conservatism and did not blow it up.

Investments

The group invests heavily in owned real estate which depresses returns on investment and returns on equity ratios.

Extract from video Thesis:

Hiboo: Guillaume Rouvier​, founder:

• Swatch has a strategy of opening stores in large cities in the world funded by own investments in real estate.

• They are a leader in luxury overall

• They build their own products and also build component for the whole Swiss watch industry

• The rise in Swiss Franc impacted sales and profits negatively due to change effects.

• Alot of net cash and net stocks of watches that cover nearly the market cap.

• PER 2025 of 11. Potential of profit growth and rerating.

Note: I am not sure where the profit growth is expected, it was not detailed in the thesis. H1 results were bad so the PER 2025 of 11 is out of the picture for now.

Undervalued Shares: Sven Lorenz, founder:

Split of the swatch group , is worth more than the market capitalization. Alone omega would be worth more.

2.5 billon net cash francs. Valuation of Breitling in the private market for example 4times sales.

2pct of customers equals 40pct of sales.

The heirs of the group must be disappointed at the stock performance compared to the luxury sector and maybe would be ok with some value

The brands and the company are attractive for private equity or for a buyer like lvmh or  Richmond. An activist could be interested.

The family shareholders are not the youngest and could pass on soon

Note: Here I agree with the sum of the parts, but I think it’s reflective of a private market bubble. Also, I disagree that the current CEO would be ok to split the group or sell. He is a stubborn prick..

“CEO Nick Hayek responded that if investors do not like the company or the way it is managed and run, they can invest elsewhere.”

So first, this person needs to be removed before any action would be taken. It could take long.

Valuation:

Well the company was valued at about 10 times recent earnings, then the bombshell came with the bad results of H1 2024.

• Net sales of CHF 3 445 million, -14.3% against the previous year at current exchange rates 
  (-10.7% at constant rates). Negative currency impact of CHF -145 million. 

• Operating profit of CHF 204 million (previous year: CHF 686 million). 
  Operating margin of 5.9% (previous year: 17.1%).

• Net income of CHF 147 million (previous year: CHF 498 million). 
  Net margin of 4.3% (previous year: 12.4%).

Now we are still at 30 times this depressed profit, and maybe 20-25 times the full year profit as the company expects an improvement in the second half of the year.

Conclusion

I made a mistake in the Swatch group, at least in the short term, and left with a 10% loss. I reinvested in the usual companies I already own, which are more defensive or cheaper.

It is always difficult to enter a new sector in a portfolio. Especially that it is entering a new paradigm where easy money is over.

There will be a time to re-enter Luxury. It seems to me that the sector is not really defensive but more like a boosted play on the Chinese and Asian customer aspirational spending. This customer is currently broken since the Chinese real estate crisis. It could have been a leveraged play on the Chinese real estate bubble all the way up, who knows?

Burberry had a massive profit decrease, Hugo Boss the same, Richemont was ok but it’s Chinese segment was hit by a -27% decline in China.

With some bubbles popping left and right, and the inflation crisis, investing is getting more difficult than in the era of free money and endless stimulus. What worked before suddenly doesn’t. For how long? It’s possible that this is a temporary slowdown, or something bigger, few know. LVMH results on July 23 will be interesting too.

In the end, I will stay on the side lines for now, focus on deep value, and Keep Swatch and LVMH in watchlists for 2025.

Tools

Check the new tools section where I developed an AI tool for company website tracking which could be of interest for exotic and small cap investors.

Next up will be a small cap write up!

Thanks