This post first appeared on 8percentpa.substack.com
This company might be a giveaway with the sub-title above and loyal followers of this substack. In order to mask it a little, we are not revealing the currency below. This is a European activist stock and the company has to turn things around for share price to rally.
Financials (Dec 26)
- Net Sales: 8bn, OP: 0.8bn, Net Income: 0.4bn
- EBITDA: 0.8bn, Free Cashflow (FCF): 0.4bn
- Dividend: 4.5, Dividend Yield: 3.2%
- Net Cash*: c.5bn, Market Cap: c.7bn
Financial Ratios
- ROE: 7% (currently 3%), ROA: 5% (currently 1%)
- GPM: 80%, OPM: 5-10% (currently 3%)
- EV/EBITDA: 11.5x, EV/FCF: 14.4
- PER: 18.1x, PBR: 0.7x
- FCF Yield: 5.5%
As mentioned, an activist recently launched a campaign against this stock and tried to get onto the board of directors but was rebuffed. Since then, interested market participants and fellow substackers wrote a lot about this name and we have no shortage of deep research.
1. Background and Business
We have written extensive about Swatch. Please check the link below:
https://8percentpa.blogspot.com/search/label/Swatch
To reiterate, Swatch is a Swiss luxury watch and jewellery conglomerate that owns the following brands as well as production sites for watch movement manufacturing and retail distribution chains. While most readers would know Swatch, few would associate the company with iconic luxury brands like Omega and Harry Winston. In fact, its billion dollar brands or potential billon dollar brands are Breguet, Blancpain, Glashutte, Longine, Rado, Tissot and needless to say, the top three megabrands: Omega, Harry Winston and Swatch itself.
Here's the investment thesis:
Swatch is an activist play trading as a net net with its cash and inventory almost as big as its market cap. Its second generation founding family needs to turn things around or face more public scrutiny. The turnaround story includes revitalizing its megabrands, improving investor relations and reinvesting in mechanical watch innovation.
Activist Angle
What's new and important in 2025 is that activist Greenwood Investors, owning 0.5% of the company has launched a public campaign against Swatch’s management. In the last AGM held in May, the activist Steven Wood receive 60% of the votes but was blocked by the family to join the board. Sensing potential to change things, other activists are definitely looking at the name.
Management is also under pressure to turn things around since the under-performance has caused its market cap to drop to single digit billions while its peers are 10-30x bigger. Otherwise, someone might privatize them.
Positives
Iconic brands: Swatch owns three megabrands, Omega, Harry Winston and Breguet which could be even bigger should management focus on them. Omega consistent ranked top 3 in the world of watches in terms of volume sold. This is the brand that was worn to the moon and its secured its legacy.
Harry Winston is also consistently rank amongst the top jewellery brands while Breguet is a horological powerhouse founded in 1775 by Abraham-Louis Breguet. The brand's history is essentially a history of watchmaking itself. The founder invented and perfected numerous technologies that are still fundamental to mechanical watches today.
Privatization: With the stock trading at net net (current assets - current liabilities > market cap), the stock is ridiculously cheap for a jewellery / watchmaker and both activists and management knows this. Privatization either by management or third party would see share price popping 20-40% depending on the premium offered.
With that, let’s move on to the risks.
Risks
China: A big part of Swatch’s earnings recovery hinges on China and should business in the Middle Kingdom continue to deteriorate, it would be much more difficult for Swatch to engineer a turnaround. Mitigating factor: Swatch commented that it is seeing early signs of recovery in China and expects good results in 2H2025.
Management: Swatch is currently helmed by the founder’s son and daughter who have little regard for shareholders. The article below revealed their stances well. As such, management might then take it private should it become unreasonably cheap. While investors buying Swatch now would enjoy the pop, ultimately, it’s not great because long-term shareholders are being taken out cheaply.
The rest of the post is on 8percentpa.substack.com
