Swatch

Stock price: SF284,1
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, Burberry 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 investment were strong and headcount were preserved…Where did the improvement come from ? We would welcome more information to understand Swatch 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.

Swatch

Stock price: SF292,8
Conclusion: Swatch watches sales bounced back 5% in H2 following a 16% decrease in H1. We upgrade our EPS to SF12.9 and SF15.4 for 2009 and 2010. Although we revise up our valuation range to SF300-SF320 per share, we feel the stock price looks close to its fair price.

Full year 2009 sales: Gross sales down 8% to SF5.4bn (down 6.3% like for like). Improved operating margin and net income compared to H1. 2010 guidance: management “very confident of further increases in sales and margins in 2010″.

-The turnaround in sales came earlier than expected with 5% increase in H2, while we were looking for a further decline of 8%. We think this is remarkable considering continued depressed demand in the US, Japan and some key European markets such as Spain. According to management, a return to normalized stock levels bodes well for wholesale revenues in 2010. Swatch is also expanding retail activities in selected locations. 2010 reported sales could be once again impacted by forex (-1-2%) based on current rates. We expect 6% reported growth in watches this year.
-Visibility on the bottom line front is limited. We need to wait until March to assess the exact impact on margins of higher watches sales in H2. However, 2010 should benefit from improved profitability in production (orders picked up in December 2009) and also easier comparison for its cyclical electronics activities. We estimate margin for 2009 and 2010 at 16.7% and 19% respectively.

Swatch trades at 19xP/E and 12xEV/EBITDA based on our 2010 estimates. The top end of our valuation range (SF320) implies a 15% premium to the luxury sector, which we find justified by the leadership of Swatch in watches and its exposure to the Chinese markets. Nevertheless, the current stock price looks close to our valuation and suggests little upside. We also feel that a higher risk premium should be attached to Swatch owing to its lack of disclosure.

Swatch Group

Stock price: SF 240
Conclusion: Rerating looks behind us. Our valuation SF240-260 does not leave much upside.

H1: Sales down 15% like for like (-16.7% reported to SF2.3bn), net income fell by 28% tp SF301m. Guidance: sales in H2 comparable, or even better than H2 2008.

We feel that management might once again be too optimistic for the second half of this year.

-We know that Swatch is less exposed than peers to Japan and the US which together account for less than 20% of watches sales, on our estimates, and more exposed to Asia ex Japan. We also understand that its stronger presence in the medium and lower price segments makes it more resistant than competitors.
-Nevertheless, Swatch remains heavily exposed to Europe (almost 50% of revenues) where consumer spending should remain depressed. Although management highlighted a positive trend since May, confirmed in July, we believe that sales in China are not sufficient to offset further decline elsewhere. Consequently, we forecast sales for the Watch segment to decline by around 8% in H2, leading to an overall decrease of 12% in 2009 to SF4bn. Production segment could decline by 10% while difficult market conditions will continue in Electronic Systems.

-The lack of disclosure which affects first half statement reduces the earnings visibility for H2. We would like to know where does the 14% decline in operating expenses in H1 come from ? is it marketing related or a consequence of lower COGS and job cuts.. In spite of cost reduction measures, we think that operating earnings could decline by more than 20% in H2 and 32% for the year. The decline in net earnings (-18%) estimated at SF 680m should be held back by a positive swing in net financial income.

-Following a strong rerating since January (stock up +65% YTD, +21% 1Y), Swatch trades at 19.7x and 17x P/E based on F9 and F10 estimates, in line with Richemont. Swatch looks more expensive than Richemont on EV/EBITDA multiple basis (12.2x F9 estimates).
Our DCF based valuation of SF260, implies a return to sales growth close to 5% next year and 8% the years after, coupled with 300bp gain in margin in three years, which does not seem particularly conservative.