Swatch Gains as Watch Components Drive Profit Growth

Swatch Gains as Watch Parts Drive Profit Growth
Net income increased 25 percent to 720 million Swiss francs from 575 million francs a year earlier, Swatch Group AG said today. Photographer: Valentin Flauraud/Bloomberg

Swatch Group AG rose the most in more than a month in Zurich trading after the biggest maker of Swiss watches reported first-half profit that beat analysts’ estimates, boosted by growth at its component business.

The stock gained as much as 4 percent to 376.3 Swiss francs, the steepest intraday advance since June 7.

Net income increased 25 percent to 720 million Swiss francs ($727 million) from 575 million francs a year earlier, the Biel, Switzerland-based company said today. Operating profit rose 19 percent to 903 million francs, beating the 862 million-franc average estimate of four analysts surveyed by Bloomberg.

Earnings at the company’s production business, which sells parts to other watchmakers, rose 49 percent. Swatch last year won provisional backing from the country’s competition authority to cut deliveries to competitors. It has been required to supply movements to third parties because of its dominant position. The regulator in May extended the provisional measures through 2013.

“This is just the start of things to come there, given the liberalization of parts and movements going on in Switzerland,” said Jon Cox, an analyst at Kepler Capital Markets. Swatch “is a class act and clearly undervalued” as a company.

The stock was up 2 percent at 368.80 francs at 10:20 a.m. in Zurich, the biggest gain in the 20-member Swiss Market Index.

Components Profitability

The production unit’s operating margin widened to 19.2 percent of sales from 16.3 percent as it ran factories at higher capacity rates, boosting efficiency, the company said. Sales to third parties rose 13 percent to 300 million francs.

Swatch is also getting more revenue from China, where rising wealth is fueling demand for Swiss-made timepieces. Exports to Hong Kong and China for the industry rose 23 percent to 3 billion francs in the first half, according to the Federation of the Swiss Watch Industry.

The company said it sees “more opportunities than risks for the future, despite some negative trends such as the exchange rate and euro situation, and a certain weakening in the high-end segment in parts of greater China.”

Gross revenue in the first half increased to 3.85 billion francs from 3.36 billion francs a year earlier. Swatch repeated its target for 8 billion francs in revenue this year.

The company’s Omega brand is the official timekeeper for the London Olympics and will feature in a new James Bond movie this year, Swatch said. Upcoming new products include a new chronometer by Breguet and a Blancpain watch with a Chinese calendar, the company also said.

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