Swiss watchmaker Swatch (XSWX:UHRN, Financial)(SWGAY, Financial) has incredible profit margins, tons of cash and is an R&D machine. The stock is down but bottomed out a few months ago.
The bearer shares trade for 344.70 Swiss francs ($340.24). The registered shares trade for 67.35 Swiss francs. Together their market cap is $18.8 billion. It takes $1.01 to buy one Swiss franc so I’m going to report everything in dollars. Earnings per share for bearer shares are $10.69, and the price-earnings (P/E) ratio is 32.25. The dividend is $6.75, and the dividend yield is 1.95%. These earnings and dividends are based on a tough 2016.
The way you figure the market cap goes like this. There are 29,987,419 bearer shares that trade at 344.70 francs so that comes to $10.34 billion. It takes five registered shares to equal one bearer share in value. There are 118,672,611 shares, and they trade at $67.35 so the value is $7.99. The total value is $18.33 billion.
Sales grew from $7.8 billion in 2012 to $8.4 billion in 2015. Profit margins are extraordinarily high at 10.2%. That is a rarity. Free cash flow was $802 million in 2015, and the free cash flow yield is 4.3%. Capex usually runs between $600 million and $1 billion. Can you imagine the money being spent on developing watches? That’s amazing. 2016 numbers weren’t so good, but we’ll get to that.
The balance sheet shows $1.462 billion in cash and short-term investments and $903 million in receivables. The liability side shows $316 million in payables and $155 million in debt. Is there such a thing as a quadruple A rating?
The high-end watches include Breguet, Harry Winston, Blancpain, Glashütte Original, Jaquet Droz, Léon Hatot and Omega. The midrange includes Tissot, Calvin Klein, Balmain, Certina, Mido and Hamilton. The low end has Swatch and Flik Flak. The company has 156 production centers and also manufactures watch parts. Swatch is completely vertically integrated.
Swatch began in 1981 under Nicolas Hayek. The company manufactured its eponymous watch with only 51 parts. From there, Hayek began accumulating other well-known watch brands. The company registered 200 patents in 2015 and 180 in 2016. I had a feeling that free cash flow was going there. The Hayek family owns about 40% of the company according to the 2015 annual report. This article on the Financial Times explains the difference between the bearer shares and the registered shares. Both have the same votes, but the bearers have five times the economic value. The bearer shares usually trade at a premium as they are more liquid.
For 2016, sales fell 10.6% to $7.553 billion. Operating profits were $805 million, down 44.5% from the previous year. The dividend was cut from $7.50 to $6.75 for bearer shares. The strong Swiss franc has hurt earnings too. The company noted that the first few months of 2017 have been much better.
Swatch is now designing batteries for electric cars. Some shareholders are a little leery of the venture. The car battery has been jointly developed by Belenos Clean Power, in which Swatch holds a 51% stake, and the Swiss Federal Institute of Technology. The company controls 60% of Swiss watch parts. Swatch will begin selling fewer parts to competitors in 2019.
Wingtergreen sold out of its position in Swatch. Perhaps the fund got tired of taking a beating. The stock is down about 50% over the last few years.
Swatch is a great company but at the right price and right time. Profit margins are ridiculous. There is tons of cash. R&D is phenomenal. The stock did bottom a few months ago. My concern is buying a luxury brand when there is so much economic uncertainty. I’d have to be really optimistic about the global luxury markets.
Disclosure:Â We do not own shares.
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