Swatch Group Valuation

Swatch Group Valuation

Swatch Group is overvalued. Its price-to-earnings ratio is much higher than its industry sector average, indicating higher than average hopes for the company’s future performance. The industry standard for the segment is 22, and Swatch Group’s Price to earnings ratio is 29.7. This is a risky state to be in, and it pressures company leaders to achieve these high standards. As a result, the leaders may develop a risky strategy that can expose the company to potential losses in the market. Alternatively, the company leaders’ risky strategies may cause the company to have higher than average expenditure which can stifle the company’s ability to take advantage of emerging opportunities. This external pressure on company performance means that the best outcomes for the company rely on a strong performance from the company’s leadership and strong performance in the unpredictable post-pandemic market.

One of the primary sources of risk in the company’s valuation is its reliance on the Chinese market to drive revenues. Swatch Group has relied on Chinese sales to drive revenue in the last decade as the Chinese middle class swelled. Similarly, the changing policies in China and its trade scuffles with Western nations mean that the market is inherently unstable for foreign operators. Swatch Group runs manufacturing plants in the Asian market as well, anchored by the Chinese economy (Enderwick & Buckley, 2020). These links to China are a risky feature for the company as the projected reduction in Chinese growth rates due to slowing manufacturing activity and increasing wage demands reduces the market’s overall growth.

The Covid-19 pandemic is also a major factor in the short-term growth expectations for the company. Although Swatch Group operates several watch brands and controls most of its supply requirements through its component manufacturing business, it deals in a primarily ostentatious market. This means that consumer behavior is unpredictable and may result in unforeseen outcomes as communities respond to the aftershocks of the pandemic-enforced economic slowdown. Thus, although the company is likely to continue to perform well in the long-term given its strong management practices and organizational structure, the instability in the market does not justify its high price to earnings ratio and suggests a drop in stock price in the near term.

The company is in a high-risk position. Its reliance on the unpredictable Chinese market exposes its trade secrets to easy reverse engineering and corporate espionage activities. China’s lower corporate regulation increases the possibility of unfair competition in the market, negating traditional measurement and prediction techniques (Songling et al., 2018). This feature leaves the company exposed to changing political and global trade results. This reactive instead of proactive position inhibits the company’s opportunities for growth by preventing effective analytical approaches that are best suited to establishing a coherent growth strategy for the company. Furthermore, the shrinking manufacturing sector in China amid international trade issues and rising labor costs has seen shifts to smaller Asian markets as the desired manufacturing and revenue hubs (Roy, 2020). This change increases capital expenditure, causing companies to have lower free cash flow levels. This phenomenon is likely to occur in Swatch Group, which holds significant investments in China.

Despite strong projections, the luxury market has seen a decline in revenues post-pandemic. This may be due to a reluctance to spend while the situation is still unstable. Most Western countries have achieved high vaccination rates and instituted tighter travel restrictions to reduce infections. This restricted movement of people and goods has slowed down supply chains and impacted multinational supply chains more than local companies that have similar costs. As such, multinationals producing competitive products may suffer from higher operational costs, which will eat into profits and reduce earnings below estimates or even further. In Swatch Group’s case, the combined effect of reduced revenue, increased costs, and higher capital expenditure may further reduce free cash flow, reduce growth rate, and increase the cost of capital that is often pegged to projected company performance.

Ethically, operations in China make the firm appear suspect in international dealings. Skeptics view companies that have ties with China as willing to cut corners to make sales. This increases the company’s compliance and public relations costs as it attempts to maintain a civil appearance in the Western business community while remaining active in the Chinese market. The association with China also sets a precedent for employees that may see increased governance issues to resolve conflicts in the company’s management as different camps disagree on how to run the firm. The company’s status as a family-run business implies strong cultural values, but internal conflict can easily unravel into chaos for the company and eliminate its competitive advantage as a well-run Swiss company with strong fundamentals. Similarly, concerns about the company’s transparency about what components are made outside the country and which are made in Switzerland may affect the company’s operations and reduce its revenue, and consequently, its free cash flow and growth rate.

Although the company is expected to rebound in 2021, sales are not expected to reach the highs of 2019. As such, predictions for the financial years 2021 and 2022 indicate only slight growth from 2020’s five-point five nine five billion Swiss francs. Taking into account faster recovery in mainland China and most Western markets, which contribute the highest revenue, the company is projected to have sales of just over six point eight billion Swiss francs in 2021 and seven-point seven billion Swiss francs in 2022. These sales would translate to an operating profit commensurate with previous years of about thirteen percent of net sales. Accordingly, these figures return a value of eight hundred and fifty million Swiss francs and nine hundred and sixty-two million Swiss francs for 2021 and 2022, respectively.

Swatch Group is an international firm and largest jewelry, electronic, and watch manufacturer and distributor company. Given that the company is an international corporate, it has to capitalize on its market so as to register returns on the investment. Market capitalization simply means measuring the company’s total value based on the stock price then multiplying by the outstanding shares. Thus, swatch Group is a domestic and interaction operation to capitalize on the market, making the company remain competitive in the market. The business's main focus is the production and distribution of watches and jewelry, which gives the company 90 percent of total sales weight. But on the qualitative analysis, it is evident that the structure and operation of financial markets that were put in place have made SG enjoy growth since 2008 due to emerging markets growth (Donzé, 2014). The contemporary luxury the company is enjoying today is due to its market position both domestically and internationally. For instance, the company comprises 18 watch brands that are split into four categories to allow it to cover the whole market. Also, it has a strong brand that includes the famous 'ETA' that provides other 'Swiss made' watch brands with a 75 percent market share because the domestic market arrangement forces Swatch to provide other companies with components at a fair price until 2019.  In addition, the qualitative analysis includes a summary of the company and a review of the current and future actions that the company can take to increase its valuation in the market. From the qualitative analysis, it is evident that Switzerland’s Competition Commission arrangement was either good or bad at the same time. Because the company had a good operation of financial markets domestically, but the fair price set by SCC keeps profits under their real potential. From 2019 onwards, the company will increase its prices due to the lack of competitors in the sector, thus increasing its earnings and margins.

Generally, when comparing SG with its competitors in the watch industry, its financial prowess becomes apparent. This is evident in its recorded profit of 2014, where the company made 1,297 million pounds, indicating that Swatch Group will undertake strategic investment in the future. Due to positive financial prowess, SG will cope with the moderate to high rivalry in the global watch industry. More importantly, the SG has established itself internationally even though its core production parts are done in Switzerland, where SG commits its workforce to guarantee high-quality products (Donzé, 2014). Also, other products of the company are done in the Asian countries because of the lower costs. Besides, the company has been able to distribute its products in advance in many countries, making it build a strong global market presence.

Given that I have analyzed the company and even found Hayek family is directing, it is evident that from the director to the finance manager, they are responsible for making sure that company valuation grows annually. The finance managers within the company should take the mandate of advising the upper management and the corporate officers to determine how and where the company assets can be allocated and required. The financial managers should come up with well-detailed statements and reports using a wide array of skills. Although the company is an international brand, some value risks have been affecting the company. The directors and management have to minimize the risk that could derail the positive returns on investment. It is evident that communication skills needed by financial managers depend on rates of evaluation, return, and valuation rates. In order for SG to create value, the company must produce high returns on investment, and this depends on the company’s competitive advantage (Anwar, 2016)). The valuation overview shows that the company has good financial health because margins are still quite good despite a drop in net margin.

The company is growing at a good rate at 10 years average revenue rate and net income growth. Still, in valuation, the company asset turnover is lower but still good if we consider that the company deals with selling high-end goods with good margins. Also, given that companies compete with other competitors in the market, the managers need to analyze the market to remain competitive advantage. By doing Switch will remain valuable in the market with high market returns on investment. More importantly, Swatch Group has an opportunity in the current world to establish itself as a different player in the emerging smartwatch market so that it can be able to register positive returns on investment like other companies such as Apple. Given that SG already offers an online retailing option, management can use the opportunity to offer an online retailing option for selected brands in some countries. Also, given that the company needs to remain competitive in the market, it has to focus on innovation. The company innovation method relies on qualitative analysis, which keeps it updated on its competitor's new product to develop the most admirable product in the market. Conclusively, I can say that Swatch group has done a good job in making sure the company remains the highest brand in the domestic market and operates the best location in some cities like London and New York. Therefore, I can say SG is a great investment entity for those looking forward to investing with the company with a wide economic moat.

The financial analysis of Swatch will start with ratio analysis. But the key terms to be examined for the company’s financial position will include the company’s valuation period and growth rate. Given that SG is much focused on profitability, the company in 2020 registered a negative drop in returns on investment, although it achieved a positive operating result of CHF 52 million for an entire year. The net sales in the electronic system of the segment decreased slightly in local currencies, with operating loss amounting to CHF -6 million (Krapf & Staubli, 2020). This is evident that Covid-19 negatively affected the SG market valuation and growth rate. Given that we need to understand why a stock is relatively expansive compared to the industry, the analysis will focus on profitability and growth rate, contributing to the company’s valuation.

The gross profit margin for Swatch is 28.92 percent; the sales in 2020 dropped to $2,333 million with a net loss of $327 million versus a profit of CHF415 million in the same period in 2019. Based on the analysis of the growth rate results, it is significant that SG made minimal sales in 2020 but made a losing profit because of the reduction of the clients in the market. Therefore, the company will need to develop a new strategy to boost its sales in the coming year ( M. L. L. C, 2021). In addition, the current real value of the company is $17.78 per share while the regular price is $15.68, an indication that the company is undervalued. Based on the qualitative analysis of the Swatch Group Valuation, the company should invest capital structure that will lead to the potential future profitability of the company.

The corporate tax rate for Switzerland is projected to remain relatively stable at the previous year’s rate of around fifteen percent. Assuming this figure holds steady for the years 2021 and 2022, the respective NOPLAT figures will be seven hundred and twenty-two million and eight hundred and eighteen million for 2021 and 2022, respectively. The net present value of cash flows for the year 2022 is as calculated below:

NPV = (1.63 * 0.75 * 850,000,000)/(1+0.15)2 = 785,000,000 Swiss francs

The terminal value of the company at the end of the year 2022 is as calculated below:

            = (1,039,125,000*(1+0.05))/(0.15-0.05) = 10,910,812,500 Swiss francs

The terminal value is well below the market capitalization at the time of writing which is quoted by Yahoo Finance as just over sixteen billion Swiss francs. This terminal value of the company supports the overvaluation claimed at the start of this paper and indicates that positive outlooks about the company, although warranted, overexaggerate the potential for growth in the company over the short term. Long-term growth is more positive as the company has a strong management structure and has shown increasing willingness to innovate and maintain its strong status in the global watch and jewelry industry. 

References

Anwar, S. T. (2016). Selling time: swatch group and the global watch industry. Thunderbird International Business Review, 54(5), 747-762.

Donzé, P. (2014). A business history of the swatch group: The rebirth of swiss watchmaking and the globalization of the luxury industry. Springer.

Enderwick, P., & Buckley, P. J. (2020). Rising regionalization: will the post-COVID-19 world see a retreat from globalization? Transnational Corporations Journal, 27(2).

Krapf, M., & Staubli, D. (2020). The Corporate Elasticity of Taxable Income: Event Study Evidence from Switzerland.

 M. L. L. C. (n.d.). What is Swatch Group’s valuation? (OTC: SWGAY). Macroaxis. Retrieved November 22, 2021, from https://www.macroaxis.com/valuation/SWGAY/SWATCH-GROUP.

Roy, D. (2020). China won’t achieve regional hegemony. The Washington Quarterly, 43(1), 101-117.

Songling, Y., Ishtiaq, M., Anwar, M., & Ahmed, H. (2018). The role of government support in sustainable competitive position and firm performance. Sustainability, 10(10), 3495.