Swatch Performs Well, But Others Offer Better Potential

by: Véronique Adam

Stock price: SF284.10 ($266.34 USD)
Conclusion: Surprisingly good earnings in watches in H2 lead us to upgrade our EPS (+6%) estimates for 2010. Despite our upgrade, Swatch offers less upside than other players in the sector, notably LVMH (OTCPK:LVMHF), Burberry (OTCPK:BBRYF) or PPR.

2009 results: Sales down 6.3% like for like to SF5.7bn. Net earnings down 8.9% to SF763m. Guidance 2010: “a good start, looking for organic growth and improved margins”

Watches performed surprisingly well in H2. Although reported sales remained flat, EBIT rose by 25% leading to only 3% decline in earnings for the full year. We struggle to explain these results: Swatch confirmed that both forex and raw material had a negative impact in H2, while marketing investments were strong and headcount was preserved. Where did the improvement come from ? We would welcome more information to understand Swatch's results…

As expected, the Production and Electronics systems segments reported depressed earnings, down respectively 66% and 26% in 2009.

Management confirmed a good start in 2010 and improving margins. We look for +6.5% organic growth (+5% reported) and +17% EPS to SF16.4. H1 will benefit from easy comps as EBIT fell by 31% last year.

Swatch trades at 17.3xP/E based on 2010 estimates, in line with LVMH and Richemont. Swatch looks more expensive than LVMH on EV/EBITDA multiple basis (11x). We estimate our valuation range at SF310-SF330 per share.

Disclosure: No positions