Are You "Watching" This Trend?

With thousands of different companies to choose from in the stock market, it definitely helps to focus on companies that pique your interest. I've always been a nut for watches, so my fascination with the watch industry translated naturally into the stock market. Following companies like Fossil (NAS: FOSL) and Movado (NYS: MOV) always came easily to me since I was familiar with the products.

Suffice it to say, I get excited when one of the original companies I began following 13 years ago when I started my investing career crushes Wall Street's expectations. It bodes well for the entire industry as a whole and gives me hope that new and interesting watch models might be on their way to the U.S. to fuel my buying habits.

Yesterday, Fossil signaled that the watch industry is not only healthy -- it's doing quite well. If you recall, back in August I strongly hinted that the sell-off in Fossil had been overdone and that investors' would be wise to give the company a second look. Since that report, Fossil shares have rebounded by more than 35%.

Fossil reported a quarterly profit of $1.87 versus the consensus expectation of $1.77. Sales increased 18% to $830 million, actually falling short of Wall Street estimates by $11 million. Despite the fact that this report looked eerily similar to August's, the stock rallied by double-digits yesterday -- and with good reason.

Staring rising costs in the face, Fossil has managed to stabilize its gross margin in the 55% to 57% range over the past four quarters. I can't say I'm a fan of flat to falling margins, but that was the primary reason Fossil's stock nosedived in August. It's pretty clear from these figures that costs are rising, but Fossil is successfully able to pass these rising prices along to consumers.

The growth in the Swiss watch industry itself is also encouraging:

Source: Federation of the Swiss Watch Industry (FHS).

In just the past two years, overall wristwatches exported has jumped by more than 8 million units. The best part is these gains are being seen in the high- and low-end markets.

Mechanical wristwatch sales have jumped by 65% from the lows of 2009. This is great news for high-end watchmaker Richemont Group (OTC: CFRUY), which saw its specialty watchmaking profits rise by 64% to 379 million euro in fiscal 2011. Movado also reported strong results, crushing estimates by $0.22 in late December with sales growing 16%.

The fashion side of the watchmaking industry is also showing rapid growth as well. In addition to another solid quarter from Fossil, Michael Kors (NYS: KORS) crushed estimates today by $0.17, driven largely by strength in its watch and accessories segment. Not surprisingly, Fossil has a licensing agreement with Michael Kors to supply the company with rebranded watches.

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Fossil and the entire watch industry should be in for good times in 2012. The industry has done a complete about-face from two years ago and is busy handing Wall Street one earnings beat after another. Sometimes I can't help but be a timepiece bull!

What's your take on the watchmakers? Is it time to buy, or should we remove the battery? Share your thoughts in the comments section below.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He did indeed sneak three watch metaphors into the Foolish roundup. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Fossil and Movado. Motley Fool newsletter services have recommended buying shares of Fossil, while in a separate newsletter service also shorting shares of Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's free, but feels the truth is priceless.

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