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On Tuesday, Swatch Group AG (UHR:SW) (OTC: OTC:SWGAY) shares were downgraded by Morgan Stanley (NYSE:MS) from Equalweight to Underweight. The firm also reduced the price target to CHF145.00 from the previous CHF175.00. The downgrade was influenced by several structural challenges facing the company, including a shrinking watch market where Swatch has been losing market share and the persistent strength of the Swiss franc adversely affecting foreign exchange. Despite these challenges, InvestingPro data shows the company maintains a "GOOD" financial health score, with several positive indicators among its 8+ available ProTips.
The analysts at Morgan Stanley highlighted that 60% of Swatch's costs are in Switzerland, which, coupled with an integrated supply chain in a high-cost labor country, makes the cost base and supply chain suboptimal. They also pointed to significant cash outflows the company experienced in 2024 and anticipate a continued soft watch market through 2025. Nevertheless, the company maintains impressive gross profit margins of 84.4% and a strong current ratio of 8.19, indicating robust operational efficiency and liquidity.
Morgan Stanley's price target is derived from a Discounted Cash Flow (DCF) analysis, suggesting a 13% downside to the current share price. The stock is trading at 34 times its projected 2025 earnings on the Morgan Stanley Exchange. The analysts noted that the DCF is particularly sensitive to changes in working capital, with Swatch's inventory levels currently exceeding 100% of sales. According to InvestingPro's Fair Value analysis, the stock appears undervalued at current levels.
Previously, Swatch Group (SIX:UHR)'s trade below book value was argued to provide a floor to the stock price, with the current price-to-book ratio at 0.71. While Morgan Stanley does not foresee a short- to medium-term catalyst that could unlock this perceived value, the company's 31-year track record of maintaining dividend payments demonstrates long-term financial stability. The new price target reflects these concerns and the lack of immediate drivers for stock appreciation.
In other recent news, Swatch Group AG has experienced significant financial challenges, reporting a 14.3% decline in net sales which totaled 3.45 billion Swiss francs, falling short of the expected 3.75 billion franc consensus. Additionally, Swatch's operating profit dropped to 204 million francs, a decrease from 686 million francs in the previous year, and its net profit fell to 147 million francs from 498 million. RBC Capital Markets downgraded Swatch's stock rating from 'Sector Perform' to 'Underperform' and reduced the price target from CHF150.00 to CHF140.00 due to concerns over the impact of smartwatch adoption on Swatch Group's entry-level brands. In addition, Berenberg initiated a Sell rating on Swatch shares, citing concerns about the watchmaker's financial performance due to industry challenges and operational decisions. UBS, Jefferies, and Exane BNP Paribas (OTC:BNPQY) also downgraded Swatch Group's stock, highlighting the ongoing challenges faced by Swatch in the current market environment. These recent developments underscore the financial and market pressures facing Swatch Group AG.
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