The Morgan Stanley Report: An Equity Analyst's Take

https://professionalwatches.com/morgan-stanleys-top-20-swiss-watch-company-ranking-for-2024/

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This has been reposted many times here but I thought you might be interested in a somewhat differentiated take.  I expect this to appeal to maybe 2 of you.

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The TLDR is that I used to be an equity analyst and one of my coverage areas was European Luxury.  I've invested (and shorted) companies all across the spectrum though none recently.

I had many thoughts on the MS report.

Things of note

  1. The absolute dominance of Rolex.  By some counts, Rolex is $10b in revenues (all wholesale) and 30% ish of the Swiss watch industry.  The long tale of brands outside the top ten is 49% of the industry.  This level of relative and absolute per revenue market share is unprecedented in any period of watch history

  2. The fall of Omega and the rise of Cartier.  for as long as I can remember, Omega was the only great challenger to Rolex's dominance over steel sports.  It had the heritage, technology, and the marketing prowess...and the wheels came off the bus somehow and Cartier ascended.

  3. The ascendance of high luxury over the traditional affordable and entry level luxury.  The rich get richer.  Patek and AP are both top 5 brands.  Richard.Mille wasn't on the list 6 years ago and is now 6th.  Vacheron, the runty child of the holy Trinity, is a billion dollar brand.  Compare instead to slow declines of Longines, Tissot, and Tag.  

  4. The general underperformance of the LVMH brands......except Hublot. For all the collector love that Zenith gets, it's not even a blip here .  The people who buy watches are not the same as the people who talk about watches.

So why does this matter anyway?

I don't do stock picks, not publicly anyway, though I do have some random observations on the publicly traded holding companies.

Richemont (Ticker: CFR SW)

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The Richemont watchmakers are a bit of a mixed bag.  IWC, Piaget, Panerai, and JLC seem to be in a steady decline though VC seems to be dragged up by its holy Trinity brothers and the drive for ever high price points.  The bright spot, of course, is Cartier, a brand so God tier that it can make mechanical watch snobs beg to buy a solar quartz.  

Richemont managers should pay attention because the strength of Cartier is absolutely masking underlying weakness in their other watchmakers.  A little TLC and focused marketing/product development effort would go a long way to helping the others out.

How confident am I that this is going to happen?

Well, this is the company where the chairman elevated his incredibly accomplished and level headed son to a board seat without the formality of a shareholder vote.  So call it 50-50.

LVMH (Ticker: MC FP)

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As for LVMH, I am somewhat surprised with how little headway they've made over the years.  Perhaps this is simply a fragment of how much the watch industry has accelerated over the years but I do wonder if their suite of brands simply isn't that strong.  Hublot is a perennial powerhouse, despite general disdain from watch literati, but Tag is still searching for its killer watch and Zenith is a niche brand at best.  The appointment of Frederic Arnault (the youngest son of Bernard Arnault and former CEO of Tag) signifies that they are serious about contending.

LVMH is a titan completely outside of watches, so it may simply just be a matter of them being willing enough to spend to win. Nothing like deep pockets.

Breitling (Private Equity owned, but I am hoping for a silly ticker like BRRR)

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Breitling is absolutely killing it saleswise though I gotta wonder when their private equity sponsors are actually going to be able to sell it.  The IPO market is dead and I don't think there's a natural buyer among the conglomerates.  I think they've also underinvested in movements and wholesaled their existing inhouse movements to buyers who have under cut Breitling in their core (****cough**** Tudor Black Bay Chrono).  The acquisition of UG is unlikely to generate revenues for years.  There's a lot of IPO style promise here, but given the nature of the market, they're probably not going to get a premium price.

Rolex (Nonprofit, lol)

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Rolex is Rolex but you can see the black bay 58 fueled rise of Tudor begin to tail off (introduced in 2018 and beginning to slip in 2023). 

I think there's clear evidence that Tudor overstepped its pricing bracket. Witness the evidence.

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Sourced from Watch Charts. Interesting no?

I think there was once this notion in some corners of the hobby that Tudor was no longer a classic flanker brand, but instead was able to independently drive its own destiny. The comment was "Omega better watch out" because Tudor had superior demand, superior value prop, superior value retention, the entire thing.

...yeah, I think we can stop arguing about that now. The market has spoken.

I do wonder how this impacts the way that Rolex invests in Tudor going forwards in terms of product development.

https://www.tiktok.com/@misterwatches/video/7279015039703567649

Swatch Group (Ticker: UHR SW)

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I have a story.  Once upon a time, a job or two ago, I was a young analyst at a soon to be large hedge fund who was trying to diligence Swatch. Being the genial and ambitious sort that I am, after doing my research, I left a message for the CFO trying to set up time to talk about their 2009 results.

And when he (or anyone on his team) failed to call back after a couple days, I left him another message. And then another. Eventually, I got the hint and decided to move onto more pressing work.

Two weeks later, I got a cease and desist letter from the Swatch legal department alleging harassment of their executive team. Additionally, I would not be allowed to dial into their annual conference call that year or any other year.

Silly me, thinking that the CHIEF FINANCIAL OFFICER OF A PUBLICLY TRADED COMPANY should actually talk to potential investors. I mean, the absolute gall of me.

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I'm not the only one. Swatch once sued Bloomberg News for publishing a transcript of their annual results call. If there was ever a company that had less interest in the long term welfare of its brands, I don't know what it is.

I have a litany of complaints.

The Moonswatch was a hit and then a bad joke as Nick Hayek repeatedly changed his mind about the distribution model.

Breguet, a watch brand with more history than Patek, VC, or AP, routinely sells below retail pricing because of poor marketing and over supply.

And yet, the greatest crimes committed are against Omega which has the heritage and technology surpassing even Rolex and yet is horrifically mismanaged day after day.

I could write a hundred page thesis on why Omega is terribly mismanaged but let's just take a best hits, shall we?

  1. Where else in the watch world do you see an everyday watch with no moving bezel (the Omega Seamaster Aqua Terra) priced at a retail discount to a 300m diver with a ceramic bezel and the SAME MOVEMENT (Omega Seamaster Diver 300M). $6300 to $5900. It boggles the mind.

  2. Why would you ever buy an Omega in AD, when you can pick up almost any Omega you please from a grey market dealer at a 30% discount?

  3. Why buy an Omega anyway when Swatch seems to give all the points of Omega differentiation to Longines for free anyway? COSC certification, flyer GMTs with Ceramic bezels, long power reserves, all for 70% of the cost.

  4. Where is all the cool tech that Omega has anyway? Spirate technology was heralded as the next great leap in hairspring technology....and I think it made it into a single limited edition Speedmaster. Like, this was supposed to be a massively industrialized improvement and yet it is nowhere to be seen.

It just breaks my heart because so much absolutely awesome stuff comes out everyday from the Swatch group. The PRX, the Zulu Time GMT, the Speedmaster 57, the NTTD Seamaster, and so on and so forth.

And yet, it feels irrelevant. Just sound and fury signifying nothing.

And me banned from Swatch Group conference calls.

Fin

Reply
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Oh and because you're the nerds in the room. 😉

@SpecKTator @celinesimon @Aurelian @AllTheWatches @Fieldwalker @valleykilmers @Mr.Dee.Bater

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😂 Biting my tongue so so hard here. But I'm truly not surprised Swatch Group did that to you.

I've been nerding out on the report over the last two days; IWC had a 13% decline due to miscalculations on pricing. i.e. they're too damn expensive.

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I was literally reading this and looking up stock tickers as you tagged me…nerd alert 🚨

This is how I imagine you as a young financial analyst

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Then, as you were harassing the CFO of a company l

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In between all that, Rolex is the king and we’re all just renting space. We all know what happens to kings, eventually. Unfortunately, the majority public sentiment is still on Hans’ side. In fact, most people don’t know any other watches other than Rolex. That might be the bigger issue here. Can Omega’s fall be correlated to the end of Daniel Craig as Bond and the lack of a clear direction in that franchise?

In the meantime, 30% off retail for an Omega sounds perfect to me.

As they say…

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Rado dropping off the list, every Swatch brand dipping, they have a lot to answer for.

When Richemont bought Minerva to give Montblanc an in-house plaything I expected Montblanc to get on to the table and imitate Cartier's success. I am either impatient or just wrong. Richemont has owned Montblanc for 30 years without them taking the turn that I expected. I thought that by now we would have people breathlessly exclaiming that Montblanc was the new Longines. I guess that they are just a pen company who also make watches and handbags.

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Oh and if Breitling had a ticker, it would definitely be SQAD

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celinesimon

😂 Biting my tongue so so hard here. But I'm truly not surprised Swatch Group did that to you.

I've been nerding out on the report over the last two days; IWC had a 13% decline due to miscalculations on pricing. i.e. they're too damn expensive.

It's a badge of honor now, especially since their stock has only managed to go nowhere over the past twenty years.

I'm sure you have much better stories to tell!

IWC is a fascinating case. I don't think Richemont has done a good job of making their argument that they are worth the premium to other fliegers (even though I think they have a good argument from a finish, capability, and movement perspective).

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SpecKTator

I was literally reading this and looking up stock tickers as you tagged me…nerd alert 🚨

This is how I imagine you as a young financial analyst

Image

Then, as you were harassing the CFO of a company l

Image

In between all that, Rolex is the king and we’re all just renting space. We all know what happens to kings, eventually. Unfortunately, the majority public sentiment is still on Hans’ side. In fact, most people don’t know any other watches other than Rolex. That might be the bigger issue here. Can Omega’s fall be correlated to the end of Daniel Craig as Bond and the lack of a clear direction in that franchise?

In the meantime, 30% off retail for an Omega sounds perfect to me.

As they say…

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Me? I'm a saint. 😈

Omega has lagged for years, regardless of Bond's hair color. It's ill served in the Swatch Conglomerate because it's the only one of he brands there that has the power to stand alone.

As such, Swatch does absolutely insane things like dilute the Speedmaster brand by introducing a cheap plastic toy version of it.

Forget what influencers said about how it was going to increase brand recognition of the Speedy, this is a simple cash grab that will only long term hurt Omega and their positioning. Gucci did it with cheap sunglasses and it took decades for them to recover.

You're right about one thing. It's good for collectors. Those Omegas are getting rather good value wise.

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Aurelian

Rado dropping off the list, every Swatch brand dipping, they have a lot to answer for.

When Richemont bought Minerva to give Montblanc an in-house plaything I expected Montblanc to get on to the table and imitate Cartier's success. I am either impatient or just wrong. Richemont has owned Montblanc for 30 years without them taking the turn that I expected. I thought that by now we would have people breathlessly exclaiming that Montblanc was the new Longines. I guess that they are just a pen company who also make watches and handbags.

Your expectations are too high. Mont Blanc has serious horological chops even outside of Minerva and Richemont refuses to invest even relatively modest amounts in their long term success. I have no idea why. Maybe the CEO insulted Rupert's daughter or something because it feels like an opportunity for Montblanc to carve out space from Longines, Tag and Tudor.

Swatch Group is a lost cause. No activist investor can push the Hayeks out....I think eventually they're going to end up in the hands of LVMH just like everyone else buy far past the point where they do have maximized their value.

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celinesimon

Oh and if Breitling had a ticker, it would definitely be SQAD

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This is such a better ticker. I hope against hope this is true.

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Edge168n

Me? I'm a saint. 😈

Omega has lagged for years, regardless of Bond's hair color. It's ill served in the Swatch Conglomerate because it's the only one of he brands there that has the power to stand alone.

As such, Swatch does absolutely insane things like dilute the Speedmaster brand by introducing a cheap plastic toy version of it.

Forget what influencers said about how it was going to increase brand recognition of the Speedy, this is a simple cash grab that will only long term hurt Omega and their positioning. Gucci did it with cheap sunglasses and it took decades for them to recover.

You're right about one thing. It's good for collectors. Those Omegas are getting rather good value wise.

Oh, I didn’t say you were a saint 🤣

I know very little about economics and less about watches. Is there any way for watch brands to innovate and disrupt (I’m twinging just saying those words) the industry. Everyone’s too busy playing Rolex’s game by their rules. How did Apple, Amazon, Netflix etc. and to a lesser extent, Tesla, come to dominate their respective markets? Is it all just great marketing? When you think cellphone, you immediately say iPhone.

Totally agree that the Swatch x stuff does nothing but piss off loyal fans and enthusiasts. They did get everyone talking though which some people would say no publicity is bad publicity. In terms of the Bond connection, I grew up with Brosnan Bond and I only associate Omega with the character. Can you get a similarly charismatic individual to be synonymous with the brand?