The shutdown of international travel and the closure of shops due to the pandemic hurt luxury watchmakers—an industry that has been slow to develop its online business.
In 2020, Swatch Group (UHR.Switzerland), the owner of Omega, Longines, and Tissot, posted its first annual loss since 1983 and cut its dividend by 37%. But there are signs of improvement, with solid demand in Greater China, which accounts for 40% of Swatch’s global sales.
The company’s stores are reopening in the U.S. and Europe, and despite the uncertainty of the Delta variant, the stock has gained 45.5% over the past 12 months to 291.80 Swiss francs ($317).
But they could have further to go. Swatch benefits from a manufacturing model in which it owns 30 production companies that supply the components for its watches, while Swatch also sells these components to third parties. This means Swatch controls its supply chain—at a time when some rivals have supply chain issues because of Covid. It also allows Swatch to make bigger profits by keeping costs low.
Swatch can also keep prices high because demand for some of its brands, including Omega and Longines, has resulted in a backlog of orders.
Rogerio Fujimori, an analyst at broker Stifel, wrote in a note that this “creates the ideal environment for pricing action at a time when there is a clear justification for that (Swiss franc strength and higher gold prices). Swatch is one of the very few inexpensive stocks in our coverage.”
Jie Zhang, an analyst at research house Alpha Value, estimates Swatch’s operating margin in the watches-and-jewelry segment has increased to 17% from 13.4% in the first half of 2019, and forecasts the stock will rise 23% to CHF360.
Swatch, which is based in Biel, Switzerland, employs 32,424 workers in 50 countries and has a market value of CHF15 billion. It fetches a multiple of 20.1 times this year’s expected earnings and is valued at a 30% discount to its peers.
In July, the company posted net income of CHF 270million for the first six months of 2021, compared with a net loss of CHF308 million for the same period in the previous year. Net sales were CHF3.3 billion, up from CHF2.1 billion.
The company said in a statement in July that “the easing of Covid restrictions announced by Europe and Asian countries, as well as resumption of tourism in many regions, will provide a further boost in sales.”
It looks like demand in China will remain healthy. Fujimori wrote in a note that searches for Omega and Longines on Baidu, China’s most popular search engine, are a useful indicator of “brand heat,” and he said those brands have made year-over-year gains over other luxury brands in the first half of 2021.
Swatch also owns Harry Winston, a luxury jewelry maker, and Hour Passion, a retailer with boutiques in airports and discount outlets.
Hour Passion sells more than 40 of Swatch’s watch brands, including Calvin Klein, Balmain, and Rado, according to its website. Swatch also owns Tourbillon boutiques, which sells its brands such as Breguet, Omega, and Blancpain in upscale resorts and shopping districts.
Swatch has another hidden jewel that could make the stock a long-term play. Swatch owns EM Microelectronic, a semiconductor manufacturer that makes low-power chips used in the auto industry. It’s a small part of the business—EM, along with two other Swatch-owned firms, contribute about 5% of total revenue—but Zhang suggests it has real potential. “Swatch will invest heavily in expanding production in the coming years,” he says.
