Post New

The Swedish watchmaker was discussed on a podcast this week. I read the annual report today and took some notes on the podcast. Below are some notes polished by Gemini, which is a little annoying but maybe better than my typos and poor English. In short they had an awful 2024 financial performance and are currently trading at 0.5 times adjusted book and one times inventory! They are making money but less than before. Great brands and watch makers but have allowed competitors to out manoeuvre them on the marketing front recently according to activists investor (have not used influencers enough). Plus China is a big and depressed market for them. Management control 44%. I haven’t bought it and am still pondering. Let me know if you have anything to add.

I like that it’s so cheap. There is a credible turnaround story for their quality products and brands. But that might not happen and it could languish for years. Can’t decide if it’s a cigar butt that will not give a final puff due to inability to control the company, or if it’s a high quality watch manufacturer with 300 year old brands with the market for mechanical watches growing and they have temporarily stumbled and it’s a 5x waiting to happen. If only it was that easy.

Now for the notes polished by AI.

What does the company do?

The Swatch Group owns a diverse portfolio of watch and jewelry brands, spanning various market segments. Here is a list of the brands under the Swatch Group umbrella:
Luxury and Prestige Range:
* Blancpain
* Breguet
* Harry Winston
* Glashütte Original
* Jaquet Droz
* Léon Hatot
* Omega
High to Middle Range:
* Longines
* Rado
* Union Glashütte
* Tissot
* Hamilton
* Mido
* Certina
* Balmain
Basic Range:
* Swatch
* Flik Flak
* Calvin Klein (CK Watch & Jewelry)
It's worth noting that the Swatch Group also owns movement and component manufacturers like ETA SA, which supplies movements to many other brands outside the group, and electronic systems companies like EM Microelectronic and Renata. Additionally, they operate the multi-brand retail chains Tourbillon and Hour Passion.


Key Highlights:

Challenging 2024 Financials: Swatch Group reported a significant downturn in 2024, with turnover down 15% to CHF 7,735m, EBIT plummeting by 74%, and profit after tax decreasing by 75% to CHF 219m. Management attributed this to a difficult global economic climate and weak Chinese consumer spending. Net cash outflow of CHF 519m, after dividends and capital expenditure, a trend similar to 2023.

Strategic Pillars Remain Intact: Despite the financial headwinds, Swatch Group's core strategy emphasizes its workforce, Swiss manufacturing heritage, the creation of enduring high-quality products, continuous innovation (supported by a strong patent portfolio), investment in future talent, and a commitment to sustainable development.
Valuation Reflects Weak Performance: The current market capitalization stands at CHF 7.8 billion. The stock is trading at a low 0.64x book value and a high 36x 2024 earnings (or 9x 2023 earnings), suggesting the market has significantly marked down the company's prospects. Notably, inventory alone stands at CHF 7.64 billion, close to the entire market cap.

Activist Investor Signals Potential for Change: Steven Woods, an activist hedge fund manager with a position in Swatch, has publicly highlighted significant concerns regarding corporate governance (family control with 43.3% voting rights) and marketing execution. He believes the company is technically strong with valuable brands but lacks marketing sophistication, leading to lost market share in the high-end segment.

Untapped Brand Value: Woods points to the potential undervaluation of key assets like Harry Winston and Breguet (with an implied valuation from an alleged LVMH offer suggesting significant upside). He argues that these brands, particularly Breguet, represent a disproportionately small fraction of current revenue compared to their potential value.

Emerging Trends Offer Hope: Despite challenges in the smartwatch market (with Apple Watch sales reportedly declining), there's evidence of a resurgence in interest in mechanical watches, particularly among Gen Z consumers who are reportedly four times more likely to purchase them. This trend aligns with Swatch Group's focus on high-quality, long-lasting mechanical timepieces.

Management Outlook and Internal Dynamics: Management anticipates a substantial improvement in sales, operating profit, and cash flow in 2025.

The CEO has previously expressed a desire to take the company private, citing a focus on long-term value creation over short-term stock market pressures. Attempts by external parties to influence management have reportedly been unsuccessful.

Investment Considerations:

Potential Upsides:

Strong Brand Portfolio and Manufacturing Prowess: Swatch Group possesses a stable of iconic and historically significant brands, coupled with deep vertical integration and high-quality Swiss manufacturing capabilities.

Latent Brand Value: Significant potential exists to unlock value within brands like Harry Winston and Breguet through strategic management and marketing.

Favorable Long-Term Trends: The apparent resurgence of interest in mechanical watches, particularly among younger generations, could provide a tailwind for the company's core product offering.

Margin of Safety: Trading at a significant discount to book value, particularly considering the value of inventory and tangible assets, may offer a margin of safety for long-term investors.

Potential for Activist Intervention: The presence of an activist investor actively seeking board representation could be a catalyst for change in governance and operational strategy.

Key Risks and Challenges:

Poor Governance and Execution: Family control and a perceived lack of marketing sophistication appear to be significant impediments to realizing the company's full potential.

Weak Recent Financial Performance: The substantial decline in profitability and cash flow in 2024 raises concerns about the company's ability to navigate current market conditions.

China Market Volatility: Dependence on the Chinese market exposes the company to regional economic fluctuations and consumer sentiment.

Resistance to Change: Management's apparent reluctance to external influence and the CEO's privatization aspirations could hinder necessary strategic adjustments.

Erosion of Balance Sheet: Continued negative cash flow could gradually erode the company's strong balance sheet.

Overall Assessment:

Swatch Group presents a complex investment case. While its strong brands, manufacturing capabilities, and potential tailwinds in the mechanical watch market offer compelling long-term value, significant concerns remain regarding its governance, marketing execution, and recent financial performance. The deep discount to book value may provide a buffer, but a turnaround likely hinges on either a shift in management's approach or successful intervention from activist shareholders. This situation warrants careful monitoring for signs of strategic change and improved execution.

Can’t decide if it’s a cigar butt that will not give a final puff due to inability to control the company, or if it’s a high quality watch manufacturer with 300 year old brands with the market for mechanical watches growing and they have temporarily stumbled and it’s a 5x waiting to happen. If only it was that easy.

This is a very interesting one with Swatch Group, if thinking from the Ben Graham style valuation alone. The price to book ratio is now at 0.61, and it has a net cash position of CHF 2 billion (market cap is $9.5b and enterprise value is $7.5b - the difference of 2 billion.

However what strikes me is the risk of the family ownership, and history of poor management and also imagining the executive incomes plus dividends. The Hayek family is actively involved in running Swatch Group and likely derives income primarily from salaries and dividends, with capital gains being secondary due to their long-term commitment to control.

In that situation, the fact that it trades at 0.61 of book value probably doesn't greatly bother them so I would say the main risk with the company from an investing perspective - you probably shouldn't be expected to 'squeeze' out that 0.39 of value any time soon. The management are unlikely incentivized to disrupt the status quo. (This is a trend with a lot of, but of course not all, business mentality in Europe also - this is considered more cultured than shaking things up).

PS: You write very well and clearly, with some of the most liked posts, so I hope you don't defer to AI too much!

- Manlobbi

Thank you Manlobbi for your kind comments.

A full investigation into management is needed and the culture. I’m going to do that, as it is an interesting company that has clearly done some great things. It is just concerning to see one son as CEO and a daughter as chair. Might be nothing wrong with that but that would need to be established as it’s a clear red flag. I’m sure there are clues as to what drives them and their talents and energy. As Buffett would ask himself: do they love the money or the business?

They might be driven to continue the legacy. They might love their staff and believe in creating great products. They might be hard working and talented.

Or they might be interested in power, money and status and might be a little delusional about their abilities to successfully run a public company.

The CEO clearly hates the short term focus of Wall Street. Or that might be a cover for poor performance. Hard to know.

There is a margin of safety if it doesn’t work out. But yes it’s an interesting but tricky one.

There will be clues…

@ EVBigMacMeal: Swatch is not a Swedish company (as you wrote); it is a Swiss company headquartered in Biel/Bienne, Switzerland. I should know, I live close to the headquarters and have been a shareholder for decades until 2011. 😊This distinction is significant because Switzerland has a long-standing reputation as a global leader in watchmaking, home to brands like Rolex and Patek Philippe, while Sweden plays only a minor role in the watch industry.
The Swatch Group was formed in 1983 from the merger of two struggling Swiss watch companies, ASUAG and SSIH, during a period when the Swiss watch industry was severely threatened by the rise of inexpensive Japanese quartz watches. Unemployment in traditional watch regions (Biel, Grenchen) was high, which sent shock waves through Switzerland. Nicolas G. Hayek, father of the current CEO Nick Hayek Jr., is widely credited with rescuing the Swiss watch sector. His strategy involved creating a low-cost, high-tech, and emotionally appealing Swiss-made plastic watch: the Swatch. The Swatch brand quickly became a cultural phenomenon, with some models trading for thousands or even tens of thousands of francs, and generated long queues reminiscent of later iPhone launches. The stock price soared.

Swatch’s identity remains closely tied to its colorful, affordable plastic watches, which have defined the brand’s image for decades. While the company still operates many Swatch stores worldwide, demand for these entry-level plastic watches has declined in recent years. You can check yourself: The Swatch shops also in big US cities (e.g. LA or NY) are mostly empty.

Despite Swatch’s success in the entry-level segment, the company has struggled to develop its premium brands. For instance, Breguet, once considered an iconic Swiss watch brand, has not received the strategic attention needed to compete with top luxury names like Rolex and Patek Philippe. Critics, including shareholders and proxy advisors, have pointed to a “closed culture,” lack of transparency, and weak execution in the premium segment as reasons for the company’s underperformance. Proxy advisors Institutional Shareholder Services and Glass Lewis have recommended voting against the re-election of the board, citing concerns over independence and governance risks. Shareholders have also criticized the board for lacking fresh perspectives and for not being sufficiently open to new management ideas. I can also tell you that Hayek Jr. is not well liked by many Swiss after several most controversial appearances (bashing of media, which seems quite popular these times).

Swatch has attempted to diversify beyond watches, for example through its majority stake in Belenos Clean Power, a battery technology company. However, these ventures have not met expectations. In 2024, George Clooney (the actor) resigned from the board of Belenos after 16 years, signaling disappointment with the project’s progress. Such high-profile departures and unfulfilled announcements have contributed to skepticism among investors.

Swatch Group’s current low valuation reflects a combination of factors: a stagnant brand image rooted in plastic watches, missed opportunities in the luxury segment, most controversial leadership, and unsuccessful diversification attempts. Many former investors (like me) avoid the stock like the plague but are ready to jump in should a leadership change take place – since valuation looks indeed good (as you wrote).

The FT had an article today about Hayek and the Swatch Company.

https://www.ft.com/content/f3ca259a-56ff-47d9-8c1b...

Subscription required.

It starts with : "When Nick Hayek was asked last year why Swatch Group did not engage more with the financial community, the watchmaker’s maverick chief executive told investors that if they did not like the way the company was managed, they could invest elsewhere".

Well, to me that says it all.

Astore

Cyberschreiber,
Swedish, what a spectacular error that was. Of course it’s Swiss. Very very different nations!

I have been learning all about Swatch since my original post and you have highlighted a few things I did not come across. Most concerning are the failed diversification attempts. Hard to justify that.

The article in the FT today I believe mentions that the CEO once published financial reports in Swiss German only to annoy investors. I also saw a proxy statement saying there is a shareholder discount on watches but we only ship inside Switzerland. Then there are the take private comments and lack of shareholder engagement.

Clearly this management is not going to take advice from an American hedge fund manager, that is for certain. That would be completely at odds with the Swiss culture.

Breguet is an incredible story I was not aware of. Marie Antoinette, the theft etc. Breguet is out of favour due to poor management perhaps but has a history and quality standard that is hard to match. It appears to be the true collectors watch and has incredible potential.

There are a lot of brands in the Swatch stable obviously and a few are doing really well despite the wider groups challenges particularly in China in 2024. Omega is performing very well and is an extremely valuable asset. Same with Harry Winston and Tissot.

Buying the company today at the value of the inventory is grossly under valuing brands like Omega (official Paris Olympic sponsor, Rory McElroy ambassador, rich legacy e.g. first watch on the moon.)

I think you are correct about wait for change before buying. Management are not concerned with other shareholders and have an unusually, almost petulant view of outsiders. Which is unfair. The reality is management control 43% or something, which is significant but external shareholders also have rights and needs.

It looks to me like the watch business boomed post COVID and then collapsed. And then collapsed further, when China went into a depression. Now the global economic uncertainties in 2025 will extend the pain for luxury goods even further. I notice that Cartier owner, Richmont, reported numbers up to 31 March 2025. Watch businesses declined less in Quarter end 31 Dec but then declined further in quarter ended 31 March. And Asia is a bloodbath.

I noticed Swatch management said after the first half results of 2014, that the second half would improve and effects of cost savings would help. In fact, the second half of 2024 got worse. Now management are saying 2025 will be better. We will see how that plays out.

If demand did continue to fall, it would push them into a loss making situation. Surely they would be forced to cut back production and lay off staff if that happened. Something they are proud not to have done to date.

At such a crazy valuation for such quality brands and manufacturing capabilities, it’s hard to imagine the share price falling further but I would not be shocked if management were happy enough with that happening and then jumping in with a take private offer when they have personal visibility on a bottoming of demand.

I might buy some if the trading pain continues this year and it gets even cheaper. But in truth, it is almost uninvestable. That said, Swatch owns some of the world’s greatest brands and owns some of the highest quality watches in the world and the Swiss reputation for true quality is not going to fade anytime soon. In the luxury goods market, that matters and it’s not hard to see these brands being very relevant and profitable for decades to come.

Thank you for your comments.

Manlobbi,
I can give you an extreme example, Gévelot a small Belgian company. They have a small pump business which is doing OK, nothing spectacular.
Family owned with more than 50% of the capital.
Very illiquid stock. Current stock quote is around 180€ and last time I looked (a few months ago) they had more than 200€/share in cash.
This situation is going on for years now. I have been to their shareholder meeting a few years ago, I specially bought one share to do that.
5 people at the meeting, all insiders. Not exactly the Woodstock of Capitalism!!
I asked why on earth they don't take the company private? Why not a special dividend? Any plans for acquisitions?
They only answer I got was "we will think about it sir". Meeting was over in 15 minutes.
Quite an experience.

Astore

5 people at the meeting, all insiders. Not exactly the Woodstock of Capitalism!!
I asked why on earth they don't take the company private? Why not a special dividend? Any plans for acquisitions?

When looking at family firms like Gévelot - this one around 130m euro in market cap - the very first thing I go to is the history of shares outstanding, and who the main shareholders are. I couldn't readily find their history of shares outstanding but it looks like it has been stable for the last few years.

They might have had a history of doing public share issuances to raise cash when they had legitimate plans for expansion. This is usually paired with a marketing strategy to raise public confidence temporarily whilst the shares are being issued. Sometimes these marketing strategies are also done when insiders want to reduce their equity to diversify their wealth outside of the company.

In essence the family may view the company as "private in effect" and then take advantage of the publicly traded facility if/when it suits.

Of course, the flip side is that it is reasonably costly to stay public for such a small size, with the auditing and financial reporting effort saved by simply changing to being private.

The decision to stay public can be driven by the prestige from the visibility of the public listing (which in some cases could slightly enhance credibility with customers, suppliers, and partners). More likely the public status offers liquidity for family members or insiders to sell shares gradually, aiding in personal wealth diversification or estate planning, even whilst the trades are a fair bit below intrinsic value.

Trading below intrinsic value (IV) is one thing, but at least they can trade at all, as when buying shares from an individual director in a private firm, there can be a feeling of uncertainty on the correct value of the trade when it isn't on the open market - the open market can have nothing to do with the fair value at all, but it still has an excitement for people that gives at least gives some spectacle, even if an illusion, of fair price.

The option to raise capital in the future, if there is temporary euphoria once every decade or two, also might be kind of seduction, even if delusional, to remain public also.

They can also use stock for acquisitions (again, foolish at low prices, but as we know capital allocation is usually trumped by short-term or spur-of-the-moment ambition).

The public structure can also facilitate wealth transfer across generations through gifting undervalued shares, reducing estate taxes whilst preserving family dominance.

- Manlobbi

Hi EVBigMacMeal,

I agree with most of what you said. Just one tiny correction: It’s true that the watch business in general has been difficult after COVID, but this is not the case for high-end watches. I’ve been trying to buy a certain Rolex model and have had to wait for years to get it. It’s even more difficult with Patek Philippe: to buy a particular model which I loved, I had to be introduced by a friend (collector) at their headquarters in Geneva and I had to send them a handwritten application to be allowed to buy the watch for CHF 56,000 (stating, of course, that I would buy and keep the watch, and not sell it for CHF 100,000 the next day). I was rejected, with no explanation offered (I now wear a Samsung sports watch... :-).

Given Breguet’s history, they could have assumed this market position as a top luxury brand.

https://www.timeandwatches.com/p/the-history-of-br...

But you can buy a Breguet with no problem at Bahnhofstrasse in Zurich.

The failure of Swatch is even more troubling if you consider that the company has dominant or near-monopolistic control in specific important niches of the watch industry (mechanical movements, low-end Swiss-made quartz watches, and watch batteries) — they have had significant problems with regulatory authorities because of this.

The main reason for their failure is quite simple: poor management. You probably can’t read this article, since it’s in German:

https://www.blick.ch/archiv/die-wunderbatterie-der...

In this article from 2017, Hayek Jr. stated that he intended to achieve 10 to 15 billion CHF with batteries for cars by 2020 (the aforementioned Belenos project). As of now, I still have to find a car with a Belenos battery... Every other CEO would have been fired after this complete failure.

At the end of the article, Hayek mentioned that he was considering taking Swatch private with all the money he would make from the battery project... And maybe this explains it all: since he couldn’t make enough money with batteries to finance going private, he chose the other path — let the stock price drop, drop, drop... Honi soit qui mal y pense.

Cyberschreiber,
Thank you for this information and perspective. The failed battery business was completely new to me. I don’t like to assume management are incompetent, just because they were handed their positions from their father. But when I read about something like this battery - total failure and allowing a completely inferior watch like Rolex to utterly out manoeuvre Breguet, combined with a blatant intention to walk all over minority shareholders. Add to that the shocking financial performance in 2024 compared to peers, it is fair to say that partnering with this family is unlikely to end well.

Sure the valuation can easily present an opportunity to make money once the general global demand for watches turns, or if Swatch suddenly started running the high end brands like Breguet more like Rolex. But that doesn’t seem likely. Your personal story about attempting to acquire a high end competitor watch demonstrates how Breguet should be run.

I recently discovered that the resale value for an unworn Breguet Tradition, for example, is significantly less than the retail price from Breguet. A completely opposite dynamic that exists for certain Rolex or Patek Philippe. That tells me Breguet is not being marketed properly.

Unrelated to investing in Swatch, I can appreciate why serious horologists consider Breguet to be superior, to relative new comers, like Rolex. If I was going to buy a watch to pass down the generations, it would be a Breguet. The craftsmanship and history is the ultimate in watches. This is currently not appreciated by the general luxury watch market participant. But I would expect that to change eventually. I think investing in companies like Berkshire will work out better than investing in watches but I am tempted from a diversification and art perspective. Based on my one week of being an ‘expert’ on watches, Breguet is a truly incredible watch it seems.

As mentioned previously, I would buy some Swatch Group stock if a couple of things changed:

New management, not of the current pedigree (highly unlikely for a long time).

Clear signs of a recovery in demand, particularly in China (may be years away).

A fundamental change in how the high end watches are marketed (highly unlikely).

You mentioned in one of your posts, the earlier threat to Swiss watchmakers from Japanese watchmakers. That is a good reminder of how this is a difficult business. Since then the threat has come from smart watches. Another headwind has been the move to more casual dress since Covid making more modern watches more acceptable and traditional watches perhaps less appealing. Then there is the rise of manufacturing technology, another threat.

Yet despite all those headwinds, I still think there is place for Swiss craftsman and history. There is something magical and desirable that people want to pay up for. I can see the Chinese going wild for Breguet in the future, if the brand and supply was intelligently managed.

Apologies for commenting on something I know nothing about. It was intended only to selfishly learn something and in that regard it was a success. Thanks again for sharing your experience and knowledge.

Best wishes

I happened to see a tweet from Steven Wood of Greenwood investors on this topic. I have no idea how to copy and paste tweets so I note that his twitter account name is

Steven Wood@GWInvestors

No doubt anyone interested can look him up. The tweet was posted around an hour ago.

deucetoace

You mentioned in one of your posts, the earlier threat to Swiss watchmakers from Japanese watchmakers. That is a good reminder of how this is a difficult business. Since then the threat has come from smart watches. Another headwind has been the move to more casual dress since Covid making more modern watches more acceptable and traditional watches perhaps less appealing. Then there is the rise of manufacturing technology, another threat.

Yet despite all those headwinds, I still think there is place for Swiss craftsman and history. There is something magical and desirable that people want to pay up for. I can see the Chinese going wild for Breguet in the future, if the brand and supply was intelligently managed.

Great post, I agree with all of that. Quartz watches keep better time and are simpler than mechanical watches. Smart watches do vastly more than quartz and keep even better time. And of course we all have a phone in our pocket that keeps the time as well. So unless you constantly need to check the time--which most of us don't--you probably don't need a wrist watch, especially not a expensive mechanical watch that doesn't keep as good of time as the device you have now.

But there is a certain aesthetic of having a mechanical masterpiece on your wrist. It is definitely a fashion/luxury statement. As you say, there is something magical and desirable that people will pay for. I think this was the money shot of your post:

I recently discovered that the resale value for an unworn Breguet Tradition, for example, is significantly less than the retail price from Breguet. A completely opposite dynamic that exists for certain Rolex or Patek Philippe. That tells me Breguet is not being marketed properly.

Rolex branded itself with its professional watches. If you really needed to know the time, like if you were an airline pilot, deep sea diver, CERN scientist, or race car driver, you needed a Rolex. James Bond needed a Submariner--functional yet refined. Thomas Magnum's father was a naval aviator, so obviously wore a GMT Master. Paul Newman the race car driver naturally needed a Daytona. Rolex managed to thread the needle between lifestyle and fashion/luxury. So Rolex might not have the best watch, but they created the best brand.

Post New

US Policy FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.