Tuesday, September 25, 2012

Swatch Group

As promised (more company analysis and stock ideas), in the next couple of posts, we will discuss a new stock idea: Swatch Group. To most people, Swatch represents the trendy Swiss watch brand with colourful and bold designs. The evergreen outlet at Raffles City might be most Singaporeans' key contact point. And some of us remember its "Skin" line which was THE coveted watch for teenagers in the 90s. Something like the iPhone 5 today. Well... those were the days.

The Swatch Group, besides the Swatch brand, is also the world's largest supplier of watch movements for mid to high end watches and owns a portfolio of brands from basic, to mid, high, luxury and prestige brands including Swatch, Rado, Tissot, Longine, Omega, Blancpain and Breguet. Don't play pray right?

Ok it doesn't have Rolex and Patek lah. Which are both privately held and we probably won't see them become listed entities any time soon.

Here's the Investment Thesis.

The Swatch Group is the the world's largest vertically integrated manufacturer of watches, components and movements with an estimated 50% market share in watch movements and 20% in mid to luxury/prestige brand segments. Its huge portfolio of basic to mid, high, luxury and prestige brands enables it to have distribution clout while its luxury and prestige brands such as Omega and Blancpain also help capture significant mind share of both general and affluent consumers. With 50% of its sales comes from Asia, which is also the fastest growing segment, Swatch is posed for sustainable long term growth with formidable business moats including brand, distribution and scale.

Well as you might have guess, I am going through the questions on the "Stocks" page where I try to answer all the questions. So next is Valuation.

Swatch trades at 15x earnings this year, but 13.5x one year forward and 12x two year forward (based on my estimates) which is not exactly expensive for such a strong franchise. Obviously the reason why it is not trading at 18x is bcos everyone is afraid of China. 1st level thinkers are saying China continues to stumble with GDP growth slowing further. The escalating tension over some remote islands and Bo Xilai coup de'tat remains to be huge risks near term. So Swatch which is so exposed to Asia and China should be avoided.

Well, good franchises seldom give you the chance to buy at low teens PE. Anyways we will discuss this issues again when we reach the "Risks" part.

Dividend is not great, 1.5-2% based on my estimates but that's to be expected for such a strong franchise. The caveat is that dividend should grow over time.

On other measures, which we will discuss in detail when we get to the Financials segment, Swatch looks reasonable too. EV/EBITDA is roughly 8x and Free Cash Flow Yield is 5%. Again, these are fair valuations and not screamingly cheap. But for a global franchise, it's probably as cheap as you can get. If it gets cheaper, gotta sell your mother and buy liow! Ok just kidding. Investments can always go wrong. Exercise risk controls.

So there you have it, a great Swiss franchise with great brands, exposure to growing markets and at a fair valuation. What more can a value investor ask for?

Next post, we discuss in deeper details the Business and other stuff!

Disclaimer: this blogger owns Swatch.

4 comments:

Zoole said...

Hi,
I love Swiss watches I can tell u that the swatch group has a near monopoly on Swiss watch movements.

But how do we purchase swatch grp stocks? Overseas brokers? I'm a noob and only have Sg stocks

Brian said...

Swatch has got two classes of stocks. Which is the better choice based on current price?

Jay Chan said...

Hi Zoole, you can buy the ADR listed in US via local brokers. But need to pay $2 a month. Alternatively you can use overseas brokerage accounts to buy.

Brian, I haven't figure out any significant differences bet the two type. I just went for the more liquid one. The one that is CHF 390 or so. Let's update if we do find anything.

Brian said...

Actually, it appears that the "registered" shares is quite significantly cheaper than the "bearer" - Registered's pe is 14.25x versus bearer of 16.25x, based on 2011 eps. And Registered shares has a higher voting power than bearer but yet it is valued quite significantly lower than bearer.