Investing in Tachibana Eletech Isn't Hard

Tachibana Eletech (8159:TSE) recently reported impressive earnings for year ending March 31, 2012. Earnings increased 18% yoy, despite revenue increasing only 4%. I had worried that the company is a low margin business, but now the management appears to be tackling the margin issue.

I summarized the 2012 results in the chart below.

In an earlier post I mentioned the company as a net-net with good earnings. I calculated net-net or net current asset value (NCAV) as current assets minus current liabilities. But Tachibana, and possibly all Japanese companies, reports assets as the sum of the following components:

1. current assets
2. property and equipment and
3. investments and other assets 

And I had previously considered the last component as non-current. However, upon reading the 2012 report I realized 90% of it is marketable securities or government bonds. They are very liquid and therefore should be treated as part of net-net. When I did this, the net-net value is much better than I previously thought! The above chart reflects this.

Tachibana Eletech is an industrial company specializing in supporting manufacturers. The Factory Automation (FA) Division is its main division accounting for almost half of its sales. The other main division is the Semiconductor Division. The Japanese expertise in manufacturing could be very useful for developing Asian countries. And the company is trying to increase exports. However, its Overseas Division is only 17% of sales right now.

For 2013, the company is targeting a 3% increase in revenue and 5% increase in income. In good times this is achievable, however an economic downturn could easily make both numbers negative as was the case in 2009 and 2010.

The company's ROE is 6.8% and its earnings yield is 10.7%. Its dividend yield is 2%. In summary, I think Tachibana 1) has a decent growth story, 2) trades at small P/E multiple and 3) its book value is not priced into the stock. I estimate its intrinsic value as 1450 yen per share. It is trading at 1100 today. To me, investing in Tachibana is a no brainer.

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Disclosure: I added to my position in Tachibana after reading their earnings report.

Seaboard First Quarter Earnings $47 per Share

Seaboard Corp reported earnings of of $47 per share, which is a 21% drop yoy. However, Seaboard Corp is a diversified agriculture company with five main segments. So, to understand the company, one should break down the operating results by segments. I decided to analyse the segments by detail.

The following table shows the most recent quarter's results, as well as that of the same quarter a year ago. And it shows the yearly results for the last three years.

Segment		Q1 2013	Q1 2012	2012	2011	2010
Pork	Revenue	409.3	400.7	1638.4	1744.6	1388.3
	Income	32.3	52.9	122.6	259.3	213.3
	Margin	7.9%	13.2%	7.5%	14.9%	15.4%
Commodity	Revenue	800.8	724.5	3023.5	2689.8	1808.9
	Income	12.3	25.7	71.9	43.2	34.4
	Margin	1.5%	3.5%	2.4%	1.6%	1.9%
Marine	Revenue	230.2	233.7	969.6	928.5	853.6
	Income	-3.3	0.5	26.1	-3.9	47.6
	Margin	-1.4%	0.2%	2.7%	-0.4%	5.6%
Sugar	Revenue	66.2	73.6	288.3	259.8	196
	Income	16.5	17	60.2	65.1	31.7
	Margin	24.9%	23.1%	20.9%	25.1%	16.2%
Power	Revenue	73	35.5	255.4	111.4	124
	Income	12.9	5.8	55	60.8	13.4
	Margin	17.7%	16.3%	21.5%	54.6%	10.8%

Total quarterly revenue was up indicating the company is growing and/or higher prices for commodities. However, profits are down due to the Pork and Commodities Segments.

Pork Segment

Looking at the Pork Segment, the company indicated corn (feed) prices were higher yoy. This may explain the lower margin. Pork cost is very dependent on corn prices. The following table shows the pork and corn price indices over the same periods. Unfortunately, in Q1 2013, the price of pork dropped at the same time that the price of corn rose. But good news is coming, the good rainy season we have now will mean corn prices will drop in the coming summer and fall. So, I anticipate the Pork Segment's profits to rise.

Commodity Trading and Milling Segment

The biggest subsidiary is the Commodity Trading and Milling Segment which is like a middle man for wheat, corn, soy and etc. Commodities for this segment are generally higher than last year, however the profits are down. That is troubling. In the report, the company states

...The decrease primarily reflects lower margins on commodity trading sales to third parties and non-consolidated affiliates, especially on sales of wheat and corn. The decrease is primarily the result of unfavorable market conditions and certain inventory positions negatively impacted by the decrease in commodity prices in the first quarter of 2013 compared to favorable market conditions and certain inventory positions positively impacted in 2012 from increasing commodity prices.

which seems to indicate that commodities purchased in Q4 2012 were sold in Q1 2013 as commodity prices dropped. Indeed, wheat prices dropped 20% from Q4 2012 to Q1 2013. Similarly, corn prices dropped 15% over the same period.

Management said in the report it cannot predict the results from this Segment for this year. Most of this Segment is in less predictable foreign countries.


Sugar Segment

The following chart shows the price of sugar. The results of the Sugar Segment follows sugar prices. Unfortunately, sugar prices were down in the quarter.

Other Segments

The Marine and Power Segments shouldn't be the main sources of income for Seaboard, although a newly introduced power facility did help in the quarter. In addition, their 50% interest in Butterball suffered a $5 million loss, versus a $8.9 mil gain in the same quarter a year ago.

So overall, the first quarter has been a disappointing start. But even if all other Segments run at the current rate, and pork prices rise and corn prices fall, the company could still earn more than $200 per share.

Seaboard is my largest holding and I bought this stock many times at below $2000 per share. Now the stock trades at $2700. My estimated intrinsic value is also about $2700. So, I may reduce my holding soon as I feel it is fully valued.

Riken Keiki Reports 2012 Earnings Up 22%

Riken Keiki (7734:TSE) recently announced 2012 earnings which rose 22% yoy, while revenue dropped slightly yoy, as the following chart shows.

Anyone dealing with Japanese stocks must bear in mine that the Japanese yen dropped dramatically in the last year. A US dollar was worth 80 yen initially and now it is worth 102 yen.

The drop in revenue could be partly attributed to the 2011 Japanese tsunami, which increased demand for Riken Keiki's products in 2011. The different directions between the revenue and earnings was due to a $1 bil decrease in cost of goods sold in 2012, and, to a less extent, greater one-time charges in 2011. The company management appears to be good at reducing costs to improve profits.

The company, unfortunately, forecasts lower profit in 2013. Which is surprising considering the recent drop in the yen. The company also proposes a 17 yen dividend, which is a 2.5% yield.

Riken Keiki is a small cap company that makes gas detectors. Other than their financial reports, which are in Japanese, there is almost no news on the company. I own this stock because I believe the company holds a valuable niche in industry. What it does must be hard to duplicate well. As well, it trades near net-net. And, being a Japanese company market cap at about $150 mil USD, the company is below the radar of the big money managers. So, I have a lot of margin for my lack of information.

On a final note, starting with this blog entry, I will reveal my estimated intrinsic value of my stocks if it exists.

My intrinsic value for Riken Keiki is 930 yen. It is 777 yen today.

Why I Own Kansas City Life Insurance

I have been watching Kansas City Life Insurance (KCLI) because it is a profitable company that trades at 55% of book value. KCLI is a insurance company that offers life insurance and annuities. It is a hundred year old company.

The first thing I ask myself is why is it so cheap. To me, it is cheap because it is a boring company in a very regulated industry. Life insurance companies are long-term businesses with little growth prospects. The following chart shows the growth in book value per share with and without dividend reinvestment.

Period	Annualized Equity Growth	Annualized Equity Growth w/ reinvested Dividends
Last 5 yr	3.4%	5.5%
Last 10 yr	3.4%	5.7%
Last 14 yr	2.7%	4.8%

The data shows the company also does not have ambition to grow beyond its area of competency. We all know that Berkshire Hathaway touts it's own equity growth at more than 20%, while KCLI is growing at 5.5%. But the plus side is that it trades at 55% of book. So the growth relative to market cap is 10% ( 5.5% / 55%). That's the earnings yield.

Other than the above, there is not a lot of noteworthy things about KCLI. KCLI is a small cap company with a market cap of about $400 mil. The company is run by the Bixby family. The company trades with a very little volume.

The company has a large balance sheet and so I was concerned about the consistency of its earnings during a downturn. Looking back, the company only had one losing year in the last 15 years: in 2008 it lost $1.50. This consistency makes KCLI a very defensive stock for downturns. And this is the biggest reason I am holding this stock now.

As a final note, the following table compares KCLI with some of its competitors.

Company	Ticker	P/E	Dividend Yield %	Price / Book
Torchmark Corporation	TMK	11.66	0.97	0.72
Assurant Inc	AIZ	9.09	1.77	1.41
MetLife Inc	MET	19.67	2.92	1.41
American Equity Investment Life Holding Company	AEL	14.28	0.95	1.71
Citizens Inc	CIA	81.97	0	0.83
FBL Financial Group Inc	FFG	11.99	1.03	1.21
Kansas City Life Insurance	KCLI	16.08	2.86	1.85
Unum Group	UNM	8.77	1.85	1.13

Where Is the Market Headed?

I focus this blog on discussing the market as it pertains to my portfolio. I try to follow the Benjeman Graham school of value investing. So I don't try to predict the market. I look at current value, and discount predictions of the future.

But now, the S&P 500 is at an all time highs of 1615, and we are in uncharted territory. I am trying hard to get some visibility of the future. We have just come from two huge bubbles in ten years. Now four years after the second bubble, we appear to be well into recovery. But the recovery in doesn't feel like a normal recovery. This recovery seems to be artificial creation of the major central banks. The central bankers of the world seem to be in a race to debase their currencies.

In such uncertain times I look for wisdom from financial thought leaders. People I really respect are the likes of Buffett, Berkowitz, Munger and Robert Shiller.

Robert Shiller is the co-creator of the Case/Shiller index, author of Irrational Exuberance, and the person who predicted both bubbles in the last fifteen years. Robert Shiller created the inflation adjusted cyclically adjusted price earnings ratio (CAPE). He says CAPE is much better than the traditional PE because it captures the effect of a whole business cycle on earnings. I have plotted the CAPE earnings yield (simply the reciprocal of the CAPE) along with long term interest rate and the inflation rate from data in Shiller's website.

The median earnings yield is 6.5%. Today, the yield is 4.5%. Compare that with the inflation and interest rate, we can see that the yield is reasonable. But still, it is lower than the median. And is the inflation rate reasonable? Can we expect this to continue in light of central banks printing so much money? That is the billion dollar question. I certainly don't know. But I am very wary because we are in such unprecedented times.

I also said in a post last year that, who knows we may hit a all time high on the S&P 500. That has happened. But I am really uncertain what's next. I just don't see how it can go much higher without coming into pricey or even bubble territory.

Do you have any comments?