If You've Got the Time, I've Got a Great Investment Opportunity

Let me be completely forthcoming with you: I am obsessed with timepieces. Some might consider watches a waste of money with smartphones taking care of all of the functions found on today's watches, but it represents in some cases a symbol of status, or, as I see it, a piece of art on your wrist.

During the recession, the Swiss watch industry was hammered as consumer spending dried up. However, since 2009, the Swiss watch industry has come back with a vengeance, even with Europe's ongoing austerity measures and a slower-than-expected economic recovery in the United States. With total export value growing by 22%, 19%, and 11% in each year from 2010 through 2012, it isn't a surprise to me that exports are up a more modest 1.7% this year. But this isn't a sign of weakness -- if you understand how to read the data, that is!

Up until now it's been all about fashionable brand-name products
Affordable name-brand fashion watch designers have, up until now, been among the top performers. While many watch companies aren't publicly traded, you still had quite a few sly ways to play the trend.

Source: Chase Lindberg, Flickr.

The most obvious selection in the space is Fossil (NASDAQ: FOSL  ) , which makes an array of electronic movement watches typically in the $40-$125 range. This reasonable range was a perfect trigger point for consumers who wanted to make a fashion statement with an easily recognizable brand name without causing them financial distress with the price tag.

Fossil also lent its hand to the rapidly growing Michael Kors (NYSE: KORS  ) , which contracts Fossil to make its watches and then rebrands them under the Michael Kors name. Admittedly, clothing has been another big aspect of Michael Kors' growth, but its watch sales aren't to be forgotten.

Other, more obscure, ways of playing the watch sector are through large designer brands that focus more of apparel than the accessories aspect of the business. PVH (NYSE: PVH  ) , the company behind such brands as Calvin Klein and Tommy Hilfiger, have ridden accessories sales higher in even the slowest of growth environments. In fact, PVH announced a deal to acquire Warnaco Group for $2.9 billion late last year with the specific purpose of acquiring the remaining Calvin Klein interests it didn't already own, presumably to gain access to consumers' seemingly insatiable appetite for brand-name goods. 

However, the latest figures from the Swiss watch industry would suggest that a change is at hand.

The figures are projecting a change
Through the first five months of the year we've witnessed a sizable decline (link opens a PDF file) in the number of watch movements being exported and a 7% decline in total wristwatch exports. But there is a clear bifurcation in the figures between electronic movements (those that run on a battery) and mechanical movements (those known as automatics or "wind-up"). Electronic-movement Swiss watch exports have fallen by 11% from the same period in 2012 as compared with mechanical wristwatches, which have seen exports rise by 4.8% during a comparable time period.

This gives us one important clue about the state of the watch industry: namely, that the upper-income consumer isn't the least bit swayed by austerity measures in Europe or the United States.

Generally speaking, mechanical movements are often more costly and considerably more complex than electronic movements. As I said previously, mechanical movements are like having a piece of art on your wrist, and it's a way of making a statement that a smartphone simply can't make (unless you've programmed Siri to speak on your behalf!). These figures demonstrate clearly that consumers are willing to pay more if the perceived quality of the watch is higher. This is strikingly similar to what we see in grocery stores whereby consumers will gladly step up to organic and natural foods with the promise of more nutritional quality.

Here's where you should be looking
Keeping this in mind, there are still a couple of smart ways to play the watch sector.

The most obvious choice is through Movado Group (NYSE: MOV  ) , which uses a combination of electronic and mechanical movements through its collection. With an average price point of $300 through upwards of $2,000 per timepiece, Movado delivers to consumers the perception of a higher-end watch and delivers the sleek statement styling that many upper-income earners are looking for. Not surprisingly, Movado has blown Wall Street's EPS estimates out of the water in each of the past four quarters and attributed its 6% sales growth in the first quarter primarily to increased sales in its "accessible luxury category." Not to be forgotten, Movado also has greater than $5 per share in cash and is debt-free, giving shareholders quite the safety net and allowing Movado the luxury of boosting its dividend should it choose to do so.

Shareholders are a bit more limited with their selection of higher-end watch choices, but I'd certainly suggest digging more deeply into Swatch Group (NASDAQOTH: SWGAY  ) , which consists of a myriad of price points ranging from the extreme high end such as Breguet and Blancpain, to high-end names like Omega, and even lower-end fashion price points found in its namesake Swatch brand. With 20 brands and/or licenses under its belt, Swatch can adapt and thrive to nearly any economic environment.

If you've got the time in your day, you should seriously consider giving the watch industry a closer look, as the fundamentals could merit further upside in the share price of companies geared toward higher-end mechanical watches.

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Related Tickers

11/26/2014 4:05 PM
MOV $27.94 Up +0.36 +1.31%
Movado Group CAPS Rating: ***
SWGAY $24.84 Up +0.08 +0.32%
Swatch CAPS Rating: ****
FOSL $110.16 Down -0.43 -0.39%
Fossil CAPS Rating: ****
KORS $75.83 Down -0.98 -1.28%
Michael Kors Holdi… CAPS Rating: ***
PVH $124.49 Down -0.66 -0.53%
Phillips-Van Heuse… CAPS Rating: ****

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