Wednesday, 5 February 2014

Swatch - valuing the 'auspicious start'

I tend to associate the use of the word 'auspicious' with China, so the use of the phrase by Swatch Group is quite interesting.  A couple of weeks ago I noted that the company's Swiss listed luxury peer Richemont was quite overt about the slowdown they were seeing in China (although this is largely priced into the share price).  How do the Swatch comments match up?

Well, profits up 17% over the full year with sales up 'only' 8.5% implies good margin movement.  This is slightly tempered though by the comments on the positive impact of the Tiffany legal win below. If the impact from this is taken out then margins were slightly down sequentially on my rough numbers...that's the historic impact of current events.  Nevertheless such progress was good enough for a 11% rise in the dividend to be authorised (dividend yield just under 1.5%, free cash flow yield around 3%).

What really caught my eye though was the outlook statement: what China slowdown?

Adjusting for the Tiffany gain, Swatch shares have been under pressure as investors have rotated away from the luxury sector over recent months.  The shares are up 4% this morning to around CHF550...

...but they have still materially underperformed the aforementioned Richemont.

What does an 'auspicious start' really mean?  If I plug 10% growth in for 2014 and put a buy level at x12 forward EV/ebit (as I did with Richemont) then I get close to yesterday's closing price of CHF525 as the initial buy level.  The share has traded away from that level today but with volatility seemingly with us in 2014, it is a level worth noting down.  

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