RBC downgrades Swatch to 'underperform,' cites structural and cyclical challenges

Investing.com -- RBC Capital Markets in a note dated Thursday has downgraded Swatch Group (SIX:UHR ) to an “underperform” rating, citing structural and cyclical challenges that could hinder the company’s performance in the coming years. 

The brokerage also revised its price target for Swatch to CHF 140 from CHF 150, suggesting further downside risk relative to the stock’s current trading levels.

Analysts at RBC flagged persistent structural pressures on Swatch Group’s entry-level brands, such as Swatch, Tissot, and Certina, which together account for 80% of the company’s volumes but only 20% of its revenues. 

These brands are facing increasing competition from smartwatches, whose adoption rates continue to rise. In 2024, the global smartwatch market was valued at $44 billion—twice the size of the Swiss watch market—and is projected to grow at a compound annual rate of 14% through 2029. 

With overlapping price points, smartwatches are steadily cannibalizing Swatch Group’s lower-tier offerings, particularly among younger consumers who make up the majority of luxury demand yet show the highest smartwatch adoption rates.

RBC also pointed to weaker performance in Swatch’s high-end brands like Omega and Blancpain, noting depreciation in their resale value compared to competitors such as Rolex and Cartier. 

Omega, for example, sees an average price decline of 30-37% in the secondary market, making it less attractive for consumers seeking value retention. 

The resale market dynamics are compounded by oversupply, with Omega listings on Chrono24, a major resale platform, surpassing those of most peers except Rolex.

Another factor weighing on the downgrade is RBC’s view that consensus expectations for Swatch’s near-term earnings are overly optimistic. 

RBC’s earnings estimates for 2024 and 2025 are 6% and 19% below market consensus, respectively. Analysts criticized the consensus forecast of a 39% EBIT growth on just 3% revenue growth in 2025 as unrealistic.

Despite some stabilization in supply, RBC expects cyclical issues, such as inventory overhangs and weak new sales, to persist into 2025. Margin pressure will be compounded by limited industrial capacity utilization in lower-priced brands.

In terms of valuation, RBC observed that Swatch trades at 20 times its 2025 earnings, a discount compared to the broader luxury sector. 

However, this valuation is not seen as compelling given the company’s ongoing structural headwinds and competitive pressures.

Its outlook is constrained by both long-term challenges, including its reliance on entry-level brands, and short-term obstacles, including market share losses and weaker performance in the secondary market. 

RBC added that the future remains uncertain for Swatch Group as it faces long-term challenges and short-term hurdles. 

Rather, RBC favors other hard luxury players, such as Watches of Switzerland, which holds an outperform rating.

Shares of the Swiss watch company were down over 2% at 03:22 ET (08:22 GMT).

Source: Investing.com