Some Updates on the First Full Year of COVID

COVID hit most of the world starting in March 2020. So, many companies have (almost) had a year of impact from COVID. Many Japanese companies end their accounting year in March and thus their year coincides almost exactly with the start of COVID. So, their annual results will be able to tell us a lot about the true extent of the world's business slowdown.

Tachibana Eletech (TSE:8159) year end revenue is expected to fall 6.2 % to ¥ 160.0 B (2020 ¥ 170.5 B). Year end EPS is expected to fall 26.0 % to ¥ 128.8, (2020 ¥ 173.9), which implies a 13.0 x earnings multiple.

Riken Keiki (TSE:7734) Year end EPS is expected to fall 19.4 % to ¥ 150.5, (2020 ¥ 186.8), which implies a 20.4 x earnings multiple.

Takamatsu Machinery Co.,Ltd (TSE:6155) year end revenue is expected to fall 38.7 % to ¥ 13.4 B (2020 ¥ 21.9 B). Year end EPS is expected to fall to ¥ -12.7, (2020 ¥ 130.8).

Installux SA (PAR:STAL) H1 revenue fell 26.6 % to € 52.5 M (2020 € 71.5 M). H1 EPS fell 73.7 % to € 4.4, (2020 € 16.6). Their year ends in December.

In H1 2020, installux experienced shutdowns in their Spain and France locations and therefore revenues fell significantly. They were still profitable though. However, the company provided no guidance for H2 2020, so we don't know what happened in the last 7 months.

Installux is conservative, well-run, and highly profitable. They expand opportunistically and thus do not overpay for acquisitions. Their expansion has mainly focused on control of the supply chain. Their niche aluminum product offering remains unchanged. Still their sales figures are respectable. It has consistently risen by about 3.5% per year for the last dozen years. And of course they have no debt!

The company currently trades at 13 times 2019 earnings, the last full year of data before COVID. While this PE is not super cheap. The company looks much better when using the EV to EBIT ratio because it has no debt and ample cash. The company's EV is 7.2 times 2019 EBIT.

The coming challenges for the company is how to put its cash to use. The following figure shows the cash and equity buildup through the years. Note that in 2018, cash dipped and PPE rose by the same amount because of the acquisition of a factory in Spain.

The simplest way to get rid of cash is to pay generous dividends but management indicated it prefers not do do so to show solidarity with stagnant employee wages. I suppose this can partially explain why the company recently began share buybacks. So far the company has bought back 2% of the shares. 

Right now, I am really not sure whether I should hold Installux for the longer term, or reduce my position. At € 390, it is probably fairly valued. So, I'll just wait and see. Their annual report should out by April, then I'll decide.

Adding More Japanese Value Stocks

In the last entry I described my view that the way to win in this market is to arbitrage across time and markets.

I've described here that right now the US largecap market is the most overpriced ever. But many overseas markets are reasonable. I am quite heavily invested in Japan and South Africa. I feel quite strongly the coming decade is going to be all about emerging markets and value stocks.

Japan is a value country. It is a very developed country that has been heavily discounted for a generation. But, whereas in previous times Japanese companies mainly disregarded the minority shareholders, now they are much more generous. One can find dozens and dozens of companies that pay more than 3% dividends, and are growing dividends around 10%.

Yes, the persistent explanation for stocks being so cheap is the aging population and their ballooning debt. But look at the US. Their debt is getting up there, and the dollar is stronger than ever. And the same goes for the euro.

In March this year, the US market fell 35% off the peak. And I took the opportunity to add to my Japanese holdings. The table here shows the four stocks I currently own. The latter two I have had for 7 years. Both are up more than 3x when factoring in dividends.

	San	Takamatsu	Tachibana	Riken
Price	¥ 1234	¥617	¥ 1760	¥2402
Marketcap (M)	¥ 13820.80 ($ 127.38)	¥ 6663.60 ($ 61.42)	¥ 45760.00 ($ 421.75)	¥ 56687.20 ($ 522.46)
ROE %	6.8	9	6.3	8.7
PE	7.45	4.71	10.42	13.78
PTBV	0.51	0.42	0.66	1.27
Div Yield %	2.59	4.05	2.73	1.67
P/NCAV	‐	0.6	0.71	‐

I also added two new stocks. My main criteria are

• little or no debt
• high dividend yield
• growing dividends
• low PE

The first, is San Holdings (TSE:9628) a smallcap funeral home operator. One might think I bought it because of the recent coronavirus death toll. But not so. The funeral business is hardly a growing business. Coronavirus or no coronavirus, the death toll hardly changes from year to year meaningfully. There is one negative that concerns me. Management said that attendance is lower at funerals because of the dwindling population and cultural trends, This may result in less spending on funerals. I will be paying attention to the number of funerals and the total revenues in the future. But right now San Holdings is the kind of stock that I am looking for: stability during the market turmoil. Yet San Holdings is down 25% off the peak! That 25% is my margin of safey.

The other stock is Takamatsu (TSE:6155) , which is a small niche manufacturer of sophisticated lathes. Now I know very little about lathes in the same way I know little about funeral homes. But their products look very complicated and expensive, as seen below. And they must be very expensive. If there is anything we learned from the current crisis, it is that the coming decades we need to rely more on automation. We need automation to serve the sick and to reduce overcrowding in factories. When you have this kind of a backdrop and the company sells for less than 5x earnings and pays 4% dividends. That's all I need to know to decide to buy.

A reader may think my analysis is very simplistic. But I make no apologies! My analysis will never mention fancy terms like enterprise value (EV), bullshit earnings (EBITDA) or sharpe ratio. My investment theme is based on simplicity, as explained best by this video. I highly recommend watching it.

That's it for Japanese stocks. In my next post I will go into some other new stocks that I acquired during the recent crash. Right now is an exciting time to invest, and I've been busy!

People, Let's get a Grip!

Happy Sunday everyone. I just had to get that out of the way!

The hysteria around where I am, is almost laughable. People are hoarding toilet paper like it will give them immunity to Coronavirus! So, get a grip!

So, I am thinking that if people hoard toilet paper as a gut reaction to a virus, then certainly everyday retail investors are capable of selling way beyond what the current situation calls for.

Unfortunately for me, I own a lot of lower-tier stocks, stocks that are in emerging markets and the cheaper stocks in developed markets. So my stocks have actually dropped farther than the market as a whole.

Below are four of my holdings. Notice that they all yield dividends way above average. All four of these companies have improved earnings. All four of these companies have increasing earnings. Tachibana Electech (8159:TSE) is in fact is a netnet. This means that it is worth more dead than alive! While I do realize that the coronavirus crisis will materially impact Tachibana Electech — the company issued a profit warning for the current quarter — nothing that happens this year should take 35% off the valuation!

	Lewis	Tachibana	Riken	EUPIC
Price	R 23.81	¥ 1248.00	¥ 1770.00	€ 3.38
Shares (M)	80.3	26	23.6	27.5
Earnings TTM	398.1	4422	3857	10.9
Marketcap (M)	R 1911.94 ($ 117.30)	¥ 32448.00 ($ 306.11)	¥ 41772.00 ($ 394.08)	€ 92.95 ($ 103.17)
ROE	8.3	6.3	8.3	8.3
PE	4.8	7.3	10.8	8.5
PTBV	0.43	0.46	0.96	0.79
Div Yield	10.46	3.85	2.2	3.85
Price / NCAV	-	0.73	1.36	-

I am posting this table to share and also to remind myself that we shouldn't pay attention to the markets because the fundamentals reflect the value of shares, not the market whims.

While we always suspect the market is due to get a shock that will cause a drop, where the shock comes from is near impossible to guess with any certainty. I never thought that when the 10 year run ends, the shock would come not from geopolitical or world economic events, but from a germ!

In 2009 when the world was suffering a financial meltdown, I read up on the great depression, and tried to draw parallels. I found there weren't that many similarities.

	Fatalities	% of World
1918 Flu	50 M	3
1958 Asian Flu	2 M	0.06
1962 Hong Kong Flu	50 M	0.03
2020 Coronavirus	10,000 so far	0.0001

Now in 2020, the world seemingly is going through a cataclysmic pandemic, I think it pays to read up on similar pandemics of recent history. The table here shows the most deadly flu outbreaks during the last 150 years when we've had sophisticated financial markets. In that time, I can safely say that these worldwide health crises have not had a negative impact on world economic growth. World War I and the 1918-1919 influenza pandemic did not prevent the roaring twenties. The two pandemics in the 50's and 60's did not affect Warren Buffett's generation in the least bit.

Sure, the world economic output could be reduced significantly because of the Coronavirus, but probably only for two quarters. China, the vanguard in this crises, is already starting to stabilize its new infection rates. I wouldn't be surprised if things go back to 3-6 months there. And my feeling is the lessons learned when this crises is over will spur new economic activity in the health care and infrastructure sector to prepare for the next one. Also, lost production can be recovered when the world consumer market returns back to normal.

But many in the world will not try to rationalize the situation and instead make a sport of hoarding toilet paper and other necessities. It is in our human nature to do something active when danger is lurking and is out of our control. And really there is no harm in doing so. However, the same mentality cannot apply to retail investing, because the market will be rational in the end.

Today, the S&P 500 is down 25% from the peak because of a germ. I think this is definitely the time to be contrarian like Baron Rothschild, who famously said: "Buy when there's blood in the streets, even if the blood is your own.".

Portfolio Update

This blog is so devoid of recent entries that I felt compelled recently to post something, anything. Fortunately I have a lot of odds and ends I can update on my portfolio and the market in general.

After riding high under Trump for a year, I am convinced the US market cannot go any higher. The Shiller PE ratio is at a mind boggling 32.3! That is higher than anytime before the great depression and is only surpassed by the dot-com bubble in 2000. On the other hand, I have holdings that are still reasonably valued overseas and even some in the US. Plus I hate paying capital gains taxes. So, instead of selling a lot I settled on hedging the US market. After all, this is a perfect time to short the US market if I am convinced it cannot go any higher.

I hedged the US market by shorting the S&P500 mini futures. Each of these futures is a contract to buy or sell a contract that will pay out $50 times the S&P 500 index on the delivery date. So suppose on the contract expiry the S&P500 is 2700. Then the contract would conceptually pay out $135,000. In reality the contract settles financially everyday, so the original purchase amount and the settlement payout do not happen but instead the delta in the value of the contract is debited or credited at the close of each trading day. So far I am turning a profit shorting the mini futures. However, I really prefer that were not the case, as each gain means an overall downward bias in my portfolio. But it only confirms my belief that the market cannot go any higher.

 A Prussian general once said that "No battle plan survives first contact with the enemy". I feel that way looking back at my first merger arbitrage situation , between Anthem and Cigna. As it turned out, all the forecasts about its chances of success were too optimistic. The merger fell apart after various state governments voiced objections and sued to block it. Despite this, I fell into the golden period for managed care organizations and both companies rose handsomely. I have since sold my Cigna shares. So the moral of this story is that with careful thought and due diligence, even if I am wrong in my predictions, I can still come out ahead. The S&P 500 hedge is another play from this same playbook.

In addition to the hedge I have also reduced my exposure to US companies whenever he opportunity arose. This was the case with IEHC and Senvest.

While the S&P 500 and my US holdings have done wonderfully since Trump's presidency. My international holdings are a mixed bag There have been laggards such as Lewis Group of South Africa. And there are some wonderful stocks, such as Installux, European Reliance, Tachibana Eletech and Riken Keiki. I have listed the basic metrics of some of my international holdings below.

	Tachibana	Riken	EUPIC	Installux	Lewis	CMH
Price	¥ 2028.00	¥ 2504.00	€ 3.47	€ 415.00	R 31.20	R 27.50
Marketcap ($Mil)	¥ 51105.60 ($ 461.66)	¥ 58092.80 ($ 524.78)	€ 95.43 ($ 110.79)	€ 125.83 ($ 146.09)	R 2602.08 ($ 190)	R 2057.00 ($ 150.2 )
ROE %	6.4	11.2	13.8	9.7	4.8	35.6
PE	13.1	14.1	6	14.5	9.9	8.3
PTBV	0.84	1.67	0.94	1.39	0.49	2.97
Div Yield %	1.97	1.2	3.46	1.93	6.41	5.85

Note that all these companies, with the exception of CMH of South Africa, all have very little debt. The companies whose stock appreciated significantly did so with a combination of increased profits and multiple expansion. I am still waiting for that to happen in my South African stocks. I have not wavered in my belief that the long term future of world economy is in the emerging markets. But in the meantime while I wait, they are yielding 6%.

Recent Portfolio News

IEHC recently reported Q3 2015 results. Q3 revenue was $4.73 M versus $3.66 M the same period a year ago. Income was $0.59 M versus $0.19 M the same period a year ago. EPS was $0.26 versus $0.08 the same period a year ago. EPS for the first 9 months was $0.65 versus $0.51 a year ago. So the company is on track for another record year!

The gains came from increased revenue and improved margins. Gross margin was a eye-whopping 39.8% in Q3 versus 31.2% a year ago. It was 35.9% for the last fiscal year, which was a record year. If the company can maintain a close to 2% margin improvement in the current year that would mean a more than 20% income improvement even if the revenue is flat.

The company credits the commercial space for the great quarter. While the military business is a more traditional customer for IEHC, I feel it has plateaued. Instead, I feel the growth will come from the commercial space, in particular the medical and transportation areas.

I feel IEHC is a $8 stock.

Tachibana Eletech just reported earnings that show it is also having a record year. The company earned ¥ 203 for the first 9 months versus ¥ 133 for the same period a year ago. Tachibana is a distributor of factory automation and electronics equipment made by Mitsubishi Electrics. Tachibana serves the Asia region and China is a lucrative market as it modernizes. Exports to China is made even easier because the Chinese Yuan is virtually pegged to the US dollar as it appreciates against the Yen.

Tachibana stock has doubled in local currency in the two years that I've owned it. And to get a better sense of why, I compiled the following data on both companies. The chart shows Tachibana's revenues and that of Mitsubishi Electric. It also shows the revenue of the Mitsubishi Factory Automation (FA) group and the Electronics group. But if we focus on the red and purple bars which are the Tachibana revenues and the Mitsubishi FA revenues, we see they move in tandem. That is very reasonable as FA accounts for almost 50% of Tachibana's revenue. Mitsubishi's stock (TSE:6503) has also doubled in local currency in the last two years. So, Tachibana's success has really been the result of Mitsubishi's success.

Putprop announced it will do a R100M (US$9M) capital raise to buy more properties and diversify away from Larimar, the bus operator that is responsible for 80% of the company's revenue This is a rights subscription to buy shares at R6.30 whereas the stock is at R7.00. So, I feel it is in the shareholder's interest to participate, or sell the stock before the deadline. This capital raise should increase the company market cap from US$20M to US$30M. I haven't decided on my choice because earlier this month the company announced that Larimar was late with the rent. Larimar seems to have some financial troubles and needs a few months to be current with the rent payments. Maybe this is nothing but it caused the stock to drop 10%, and it is factoring into my decision for the rights description right now.

Tachibana Eletech Splits Stock

Tachibana Eletech is having a good year operationally. After three quarters, the operating profits are on track to be 10% more than last year. And revenues are on track to be 5% more. However, management also threw in a surprise. They said the company will report an ¥ 62 per share extraordinary profit from acquiring Takagi Shokai Corporation. So, the company expects to a ¥ 204 per share profit for the year versus previously estimated ¥ 142. Takagi Shokai Corporation is a distributor of electronic components similar to Tachibana. Tachibana used to own 48% and recently paid ¥ 703M to increase the stake to 81%. Making Takagi Shokai now a subsidiary of Tachibana.

	TSE:8159
Price	¥ 1715.000
Market Cap	¥ 37044.77 M ($ 307 M USD)
P/E TTM	7.0 x
Div yield	1.3 %
P/BV	0.82
ROE	11.7 %
ROIC	12.9 %

But how can a company make a profit from an acquistion you say? The reason is simple. Tachibana earned ¥ 1.6B of negative goodwill from buying Takagi Shokai Corporation. Goodwill is the difference between the cost of an acquisition and the book value of the acquisition. Typically, goodwill is positive because the cost is greater than the book value. This is the first time I have heard of a company acquiring another for less than book value. But while goodwill is normally kept on the book as an intangible asset, it isn't so if the goodwill is negative. It is recorded as income on the books.

Going from 48% to 81% ownership changed the treatment of Takagi on Tachibana's books, which prompted the negative goodwill. The goodwill includes all of the value above cost, including cost for the 48% ownership previously purchased. The bottom line is that Tachibana Eletech increased its book value by ¥ 1.6B from this transaction.

Management also announced that they will do a 5 to 6 share split in April 2015. It seems like a rather odd thing to do. Maybe management feels the current stock price is getting too high and they want to lower it, but not too much.

Now I sense the company is doing something to increase shareholder value. This stock has doubled in the less than two years that I owned it in local currency. But in USD, it is up only 61%. That's one thing to keep in mind, the Japanese stocks and indices look great in the last two years but it is partly, if not mostly, due to the monetary easing by the Abe administration. And what works can also turn on you. If the yen strengthens, the market will probably tank. But I don't think too much about currency because it is almost impossible to predict. But regardless of the currency, I am very pleased to see the stock trading closer to book. And the company's balance sheet may also be understating the true book value as this acquisition shows. The company has small holdings in 30 other companies worth ¥ 8B. These holdings are carried at cost and may be worth much more. In any case, I feel that the book value is the fair intrinsic value for Tachibana. I will only consider selling when the stock reaches book value.

And finally, Happy New Year!

Summer Quarterly Updates

Tachibana Eletech reported Q1 total income increased 18.9% yoy; revenue increased 6.7% yoy. This improvement was partly the result of strong industrial demand in Japan. The results are even more impressive because the market presumed that last quarter's results were good because customers moved forward purchases to avoid the impending consumption tax increase. Q1 results were the first that included the consumption tax increase, and the results would have been impressive even if there was no tax increase!

The company also upped its year end EPS guidance from ¥161.41 to ¥170. The stock has rallied recently but it is still selling for only 8 times EPS guidance.

Riken Keiki reported earnings increased 19% yoy. Revenue increased 6.6% yoy. This company is firing on all cylinders. Last year its earnings increased 14% and the year before it increased 22%. This is my best performing Japanese holding, increasing by 90% in the 18 months that I've held it. When I initially bought the stock 18 months ago, the fact that it was a netnet was my margin of safety. Now it has risen 90% and is no longer a netnet. The market has priced it more as a earnings growth engine. But the stock still trades below book and and at 11x EPS guidance. This is Ben Graham's value investing at work: buy a good cheap stock, and usually something good happens!

Fujimak reported a ¥ (38.39) loss per share versus ¥ 3.5 a year ago. Revenue decreased 5% yoy. This was a surprise...no... a shock! The company said much of this was the result of a natural pullback from its knockout Q4, when it earned ¥ 99 a share, and to a lesser extent the consumption tax increase.

The company gave an EPS guidance of ¥98, which I hope is true but I also fear may not be met. The company trades at 8x EPS guidance.

Now on to US stocks. Seaboard Corp had one of its best quarters in history. Because of record pork prices, EPS was $79 versus $33 a year ago. H1 EPS was $119 versus $81 a year ago. The stock didn't budge after the earnings reports. In fact it dropped a bit because of plunging pork futures. Pork meat was regularly around $0.80/lb for the last several years, then it suddenly jumped to a high of $1.30. Today, futures for delivery in the next several months is back at $0.90s. Next year delivery dropped but now is back in the 90s also! So the weak stock performance is understandable.

Kansas City Life Insurance reported Q2 earnings slight down. Q2 EPS was $0.77 versus $0.98 a year earlier and premium revenue was down 5%. Book value has grown steadily and now the stock trades at 2/3 book. It also pays a 2% dividend. I feel this is one undervalued and neglected company.

Investors Title Insurance Company reported earnings were down 20% yoy. Premium revenue was flat yoy, which is encouraging considering the exceptional refinancing activity last year. The decrease in earnings was primarily the result of increased commissions. The company now trades at 1.1x book.

Putprop pre-announced that the company's earnings will be approximately ZAR$1.50 vs ZAR$0.86 a year ago! That is a 75% increase and even after the stock jumped by 30% from my initial purchase, it is still trading at 6 times earnings!

IEHC reported Q1 EPS $0.17 versus $0.23 a year ago. Sales was down 4% yoy. I would've liked to see better yoy results, but last year's Q1 was exceptional. I don't really know what to make of this tiny company. I had hoped based on my reading that this company's sales would take off in the last several quarters. But this hasn't happened. The company's sales are quite erratic. I'll pay close attention to this one in the coming quarters.

Tachibana Eletech and Fujimak Results Fail to Satisfy Investors

TSE:8159
Price	¥ 1161.00
Market Cap	¥ 25078.12 M ($ 246 M USD)
P/E TTM	6.5 x
Div yield	2.0 %
P/BV	0.57
Price/Netnet	0.65
ROE	8.8 %

Tachibana Eletech (TSE:8159) and Fujimak (TSE:5965) both reported 2013 results and both stocks tanked by 10% in the last month.

Tachibana's revenue was ¥141.9 B versus ¥123.8 B the previous year. The company earned ¥3.8 B versus ¥2.8 B the previous year. In addition, the company increased its dividend to ¥23 from ¥20 a year ago. The stock dropped mostly because the company's 2014 revenue and income guidance was ¥146 B and ¥3.5 B, respectively. And the company intends to give a ¥22 dividend. The market may be disappointed by the guidance, but I don't think that justifies such a low stock price.

In view of the disappointing stock price, I find myself doubting my thesis on this company. Tachibana Eletech is a wholesaler of factory automation and related products. Such a business requires a large large balance sheet. So, now I think being a netnet in this line of business isn't as attractive as in some other lines of business. This is something I am learning to appreciate. Nonetheless, when I bought I had such a margin of safety that I am still sitting on a USD gain today.

TSE:5965
Price	¥ 719.00
Market Cap	¥ 4712.04 M ($ 46 M USD)
P/E TTM	4.1 x
Div yield	2.8 %
P/BV	0.40
ROE	9.6 %
LT Debt/Equity	0.33

Fujimak had a similar story. Their 2013 results were great. Revenue was ¥36,276 M versus ¥32,713 M the previous year. Income was ¥1146 M versus ¥1246 M the previous year. See numbers in the box; the company's numbers relative to market cap are tremendous.

However, the stock tanked because management expects a -44% income drop in their 2014 guidance! But then again I have noticed that these standard projections are always quite conservative. And both companies have expressed worry about the consumption tax increase that comes into effect in April. But as usual, I think the market is discounting the macro issues too much. I wouldn't be surprised if the worries of slowdown don't pan out and these two companies do better than expected in 2014.

Seaboard Reports 2013 Results

SEB
Price	$ 2620
Market Cap	$ 3127.18 M
P/E TTM	15.2 x
Div yield	0.0 %
P/BV	1.26
ROE	8.3 %
LT Debt/Equity	0.13

Seaboard Corp (SEB) reported that Q4 was the best quarterly result in 2013, but for the year income was lower than 2012. Revenue for 2011 2012 and 2013 were 5746M 6189M and 6670M, respectively. Income for 2011 2012 and 2013 were 346M 282M and 205M, respectively This appears to indicate that margins are dropping. SEB has many businesses segments, all of which are cyclical commodities. So I wouldn't read too much into the drop.

The pork segment is Seaboard's largest at 1/4 of total sales. This segment made up 3/4 of the company's profit however. The marine segment turned in a loss, though it was profitable last year. Shipping is suffering from a glut of ships and rates don't appear to be improving much. Seaboard is committed to shipping however and it is investing in several new ships. I believe Seaboard wants to stay in shipping to be a vertically integrated food company.

Overall I feel the company's management has a very long term view. They allocate capital prudently with little debt. And this shows in their consistent revenue growth. The last year's numbers came in a bit lower than I would like but in my eye this is a company that is trading at 10 times forward earnings.

In other news from my portfolio, Sterihealth (ASX:STP) resported H1 earnings were $0.10 AUD, which is the same as a year ago. However, sales were up 9%. This indicates some margin pressure. Still the company trades at 6.5x earnings.

Tachibana Eletech (TSE:8159) recently announced the company will expand into Indonesia. But at the same time, Tachibana Eletech will sell ¥ 1 B (about $10 M USD) new and treasury shares! They say the purpose is for buying office buildings which would save on leases. What the heck?? What is that about?? This company has ¥ 13 B in investments, of which ¥ 8 B is marketable equities and ¥ 2 B is bonds. And yet they are issuing shares to raise a relatively small amount. Several possibilities come to my mind. Maybe it is patriotism; the company wants to keep its government bonds. Maybe management management feels the stock price is overvalued; but the company is very profitable. Maybe the company is allocating the shares to favoured shareholders. But I can't find a very plausible reason really. I am baffled. What do you think?

On the other hand, the company seems to be doing great. Sales are up, exports are up. The company just raised guidance for the year to ¥ 179 which means the company trades at 7.2x earnings. The company also raised the dividend payout for the year from ¥ 20 to ¥ 22.

Tachibana Eletech Q3 Earnings up 39%

Tachibana Eletech (TSE:8159) reported 39% increase in earnings for the first 9 months versus a year ago. Sales were up 14%. Comprehensive income was up a whopping 155% on asset gains (mostly securities). Earnings reflect operations, but comprehensive income reflect the change in book value. The book value is up 11% in the last 9 months. I bought the company for the balance sheet and earnings. The last quarter shows both are firing on all cylinders.

Price	¥ 1265
Market Cap	¥ 26.4B ($259M USD)
P/E	7.3x
Div yield	1.2%
P/BV	0.59
Price/Netnet	0.64
ROE	8%

Operationally, the company showed the most sales gains in their Factory Automation division and their Semiconductor division. These are the two largest divisions of the company. Exports are at 18% of sales, and I hope they improve that number.

This stock could easily trade at ¥ 2000. I don't know what it would take to get there, other than hostile takeover or huge share buybacks, which I feel the company won't allow. I am a little frustrated, but then again I am patient and I am not a believer in catalysts. I don't try to predict events. But I also cannot ignore the market price of this company because I am not Japanese, so I don't intend to hold Yen forever. When this does reach what I believe is my intrinsic value, I will sell and repatriate the money.

My Japanese Holdings in H1

In February this year, I documented my initial purchases of two Japanese small caps here and here. The initial reason was 1. the Japanese market is oversold, 2. the economy was due for a rebound. I think a lot of investors under-estimate how often the market will revert to the mean. I think Japan will rebound, maybe not to its 1989 glory, but it will get its day soon. And even if I am wrong, I have a big margin of safety with my two particular stocks.

At the time, I did not really know Abenomics, but Shinzo Abe the Japanese prime minister has had a great effect on the economy. The market has been up about 66% during his tenure — in local currency. However it is still a lot even in US currency terms. But whether Abenomics will help Japan in the long term is still unknown.

Abenomics has directly pushed the Japanese Yen from 80 yen per USD to 100 per USD. This dramatic change has made many big Japanese exporting companies profitable, such as Hitachi and Toyota. I have read, however, that the lower yen has not resulted in more export volumes. This is somewhat worrisome, as greater volume is what will drive growth for the longer term. Furthermore, many Japanese companies are repatriating money and assets from overseas because of the increased value of foreign currencies. This can dramatically effect profitability but only temporarily.

If I had time I would analyze the financial reports of major Japanese exporting companies to carefully analyze the recent effect of the lower yen. But I don't, so instead I just analysed the results my Japanese holdings in the first half year.

Firstly, Tachibana Eletech reported increased earnings for both quarters. Tachibana is a factory automation company that exports about 20% of sales, based on my estimates. The following shows their results for the first half fiscal year. The results were much better in the second quarter compared to the first. This may be a delayed reaction to Abenomics. Operationally the company is doing better although management is still concerned about the slowdown in China and rest of Asia. But a big chunk of the delta was non-core earnings. I grouped them as non-operational earnings and extraordinary earnings.

Secondly, Riken Keiki reported similar results for the two quarters; with the second quarter better than the first. Riken Keiki must export a large percentage of their products. I even see their products on ebay.

So operationally, both are better and the same period last year but Tachibana's results were greatly affected by non-core income. The operational aspect could be both directly the result of Abenomics or indirectly, such as a more positive economic outlook.

These two companies are up around 35% since I first wrote about them, in local currency terms. But I think they are still way undervalued, if one simply looks at the books. However, I do understand that they are at their current price mostly because of the Japanese economic climate. My biggest concern is the huge Japanese debt. This debt is owned by the Japanese people and Japanese companies. I am still figuring out how this will all play out. If the Japanese cannot service the debt, then Japanese will default to themselves, or the Japanese can depreciate their currency so that they can afford to service it. In the latter, more realistic case, the resulting inflation will cause their goods to be more competitive in the world. The key difference between Japan and other countries with high debt is that the world wants Japanese goods! This, in my opinion, will allow for stable calm devaluation of the Japanese Yen, if it does happen.

The conclusion is, I am still very much long my Japanese holdings. In fact, I even bought a new Japanese microcap: Fujimak (TSE:5965). I hope to post a about it soon.

Tachibana Eletech, Pfizer and IEH Corp Report Solid Earnings

Earnings season is in full swing. And my holdings are doing well.

Tachibana Eletech (TSE:8159), a small cap factory automation company reported a great start with 1Q 2013. The company reported EPS of 34 yen, a 60% increase yoy. Revenue increased 10% yoy. I presume that the yen's recent drop contributed to the company's results. Management projects 134.75 yen EPS for the year. Which translates to a PE of 7x! In addition, this is a netnet company (see previous post).

The only disappointment with the company is the paltry 20 yen annual dividend (2% dividend yield).

Pfizer reported Q2 adjusted EPS of $0.56. This adjusted EPS leaves out special items such as the Zoetis share sale. For the year, the company projects adjusted EPS of $2.10 - $2.20 and actual EPS $3.07 - $3.22. This is all not surprising. With shares trading at around $30, Pfizer has a healthy P/E in the low teens (adjusted earnings). Recently, I have sold some shares in my tax-sheltered account. But, I'll leave the rest alone. Pfizer is one of those solid stocks in a great industry that you can just leave alone without worry.

IEH Corp (IEHC) reported full year earnings of $0.40 vs $0.48 a year ago. That is a PE of 7x also. Total revenue for the last two years were almost identical. So, it seems margins slipped a bit. IEHC is also a netnet (see previous post).

IEHC is a tiny company with a market cap of $8M. They only do one thing, electrical connectors, and they do it well.  The company has very few customers. The company sells 31% to the corporate world, 63% to the military. All this is little changed from last year.

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.

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.