EUR 850.00 For Business Accounts Only

Morningstar | Swatch’s First-Half 2018 Strong With Market Share Gains; Maintaining FVE

We retain our fair value estimate of CHF 361 per share for narrow-moat-rated Swatch as the company reported strong first half sales that were ahead of our expectations. Nonetheless, margin improvement was a little more muted than we expected, with less leverage on other operating expenses, which mainly include sales and distribution costs. The company is also restarting hiring with 2% new employee additions during the first half, mainly in the production unit, where capacity limits have been reached in several areas. We plan to incorporate those changes into our model but expect them to have a broadly neutral impact on our fair value estimate. We see shares as expensive at current levels.

Sales growth of 14.7% was stronger than Swiss watch export figures in January-May 2018, and Swatch gained market share in all segments and regions. The currency impact on sales was positive at 2.1%. Asia and the Americas were the strongest-performing regions, a trend also highlighted by the competition. The company noted strong performance across brand and price ranges, without mentioning numbers. This compares to a slight improvement in Swiss watch exports priced below CHF 200 (export value) after two years of double-digit declines; mid-single-digit growth in the segment priced at CHF 200-CHF 500; and high-single-digit/double-digit improvement in the higher-priced categories. We continue to forecast slower growth for the lower-priced segments within the group but highlight Swatch’s dominant position in the lower-priced part of the market (over 60% market share) and negotiating power with distributors (given the wide array of brands on offer).