The Swatch Group: Stock of the Week

Key Takeaways on Swatch Group

- The competition from the smartwatch category is fading

- Swatch Group is a 5-star stock and has valuation re-rating potential as its earnings imrpovement prospects become better recognized.

- Swatch's China presense will act as a revenue growth driver. 

Kate Lin: As Apple's new watch series launch garnered a lot of attention, many are wondering if traditional watchmakers should be concerned. One such peer is our Stock of the Week: Swatch Group (SWGAY).

Competition from Smartwatches Eases 

The competition was particularly intense in the low-end segment, where Swatch's quartz watches operate. However, as the smartwatch category has matured, the pressure on traditional watches has started to ease.

Our analyst Jelena Sokolova points out Swatch’s that high-end brand, like Blancpain, remain largely unaffected.

Luxury Lovers in China Will Support Growth

There’s another crucial aspect to Swatch’s growth potential – Its exposure to the Chinese market. Despite the macroeconomic headwinds in China, Swatch stands to benefit from its substantial presence here. Chinese consumers have a strong appetite for luxury goods and are expected to continue driving both near-term and long-term demand.

With a rebound expected in Chinese luxury buying as demand slows in the West, Swatch is well-positioned for growth. Plus, the rising income levels in China will act as a catalyst for Swatch’s long-term revenue growth.

Shares of Swatch are currently undervalued, presenting a buying opportunity. Sokolova predicts a potential rerating as Swatch’s earnings improvement prospects become better recognized.

For Morningstar, I am Kate Lin.

 Swatch Group Bulls Say

- Around three quarters of Swatch's revenue and higher share of profits are from higher-end watch and jewellery brands, and is not affected by smartwatch competition. The performance of lower-end brands should stabilize as smartwatches reach adoption maturity.

- Harry Winston, among the few global brands in luxury jewellery, a niche with especially high entry barriers, offers growth and margin expansion potential.

- Swatch is increasingly taking action to tackle costs in low-end brands and limit grey market channels for highend brands.

 Swatch Group Bears Say

- Around 50% of demand for Swatch products comes from Asian customer, most notably Chinese, making the company vulnerable to adverse economic shocks and demand changes in the region.

- Swatch tended to overexpand in capacity and hiring in prior years, and could be at risk of doing it again as demand improves with an adverse impact on profit.

- Swatch is relatively slow in developing controlled online distribution for the group’s high-end brands. This may leave the company competitively disadvantaged as online and mobile distribution channels gain ground, especially among younger consumers.