Tuesday, February 26, 2013

Why I Own Tachibana Eletech

In my last post I picked up Riken Keiki,  my first Japanese small cap (actually my first stock from an overseas exchange). I bought it for two simple reasons: consistent great earnings and a great balance sheet. The PE is less than 10. And the balance sheet I can illustrate with the following chart. It is quite compelling.

Today, I bought another Japanese small cap for the same reasons: Tachibana Eletech (8159:TSE). This company sells factory automation and electronics equipment for industrial uses. The company mostly sells in Japan but it is expanding overseas, in particular Asia. The company's operating margin is only 13%. And this is the only thing that worries me. But I guess this comes from being primarily a distributor.

Like Riken Keiki, Tachibana Eletech is consistently profitable. Both companies trade at PEs below 10.  Tachibana Eletech's balance sheet chart is also impressive.

I can find almost no news on the company so all my information has to come from the company's website. Fortunately, the site has complete investor documentation in English. I see the company has a large accounts receivable. But the company seems to have no problem collecting on its bills. The company's balance sheet shows a reserve for doubtful accounts that equals only 2% of the total accounts receivable. The accounts receivable is a third of the years total revenue, so the company can get paid in three months, on average.

I believe that Tachibana Eletech is a good company that focuses on its competencies. The company is 90 years old. And it is the type of company that has helped make Japan so dominant in manufacturing.

So, this is the story of my second, but not last, Japanese small cap. I cannot predict my Japanese stocks play out but I expect it will eventually play out well, maybe in a year, maybe in five years or longer. I cannot predict Mr. Market, I can only control what companies I buy and I can vaguely guess how much they will earn.

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