Shares of Swiss holding company Swatch (UHR.CH), centered around the watch industry (ETA mechanisms, luxury timepieces), are losing 1.5% today and are approaching the peak of the March 2020 panic (Covid-19). July's share purchases (about 31 million Swiss francs) by the Hayek family, which owned more than 43% of the group's shares before the purchases, failed to improve investor sentiment. In July, Swatch was downgraded to CHF 170 by Jefferies analysts. 

Recession fears but sales in China ... rises?

  • Despite the short-term adversity of recession concerns in the US, Europe and consumer weakness in China, the company has a very healthy balance sheet and very low debt. It also maintains high gross margins, which were as high as 84% in 2024
  • Gross profit, in the first two quarters of 2024, remained relatively resilient, despite a nearly 7.5% y/y decline in sales in the first half of the year and a 14% decline in Q2. Q2 sales were 3.45 billion francs, compared to 3.75 billion forecast. Net income in Q2 2024 fell sharply to 147 million francs, down from 498 million francs in Q2 2023.
  • In China, the company's sales rose 10% year-on-year in the first two quarters of 2024, providing some resistance to the thesis of slowing demand in the market there; however, the increase was measured against a very low 2023 base. 
  • The company raised its dividend from 2020 to 2023 and has been paying it consistently for 31 years. Potential profitability problems could cause a change in dividend policy, with further declines in valuations as a likely result. In recent months, the Hayek family, which holds key positions in the company, has been criticized by the investment community for its restrained comments on the company's business and prospects.
  • The valuation of price/earnings for the past 12 months is 17, and the implied ratio of price to expected future earnings for calendar year 2025 is about 15. This suggests that the group's shares still trade at a premium to some of the stocks of 'luxury' companies like France's Kering or Hugo Boss.
  • LVMH's closure of luxury flagship boutique Tiffany in Shanghai to investors was a signal of evaporating demand for luxury goods in China. As a result, we've seen significant declines in the shares of Swatch and many other fashion companies in recent days.

Swatch Group (UHR.CH)

The RSI indicator on the daily interval indicates an extreme oversold level below 20 points. Overcoming the 200-session SMA200 average at CHF 200 per share could potentially herald a trend reversal. The main short-term resistance remains CHF180, which could be tested if the scenario of the unwinding of the recent downward impulse materializes. A huge scale of recent decline may be a reason why 'mean-regression' will also support a short-term rebound, if markets sentiments around luxury sector improve.

Source: xStation5