TMFMmbop (97.59)

Buy This Japanese Giant

July 02, 2009 – Comments (1) | RELATED TICKERS: KYO , QCOM

No, it's not Godzilla, but before we get to this Thursday's CAPS Champion of the World Contest idea, I just wanted to remind folks that we leave for our research trip to China in just a matter of days! If you haven't signed up yet to receive our free -- yes, free -- dispatches from the road and you're not a Global Gains subscribers, you will not receive them. And trust me, you want to receive them.

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And now, your idea (from the mind of GG co-advisor Nathan Parmelee)...

Long Kyocera (KYO)Thesis

I’ll be the first to admit that Japanese conglomerates aren’t growth stories and other than their R&D efforts aren’t very dynamic firms. But like any other company they can get far too cheap, which is exactly what I think has happened with mobile phone, office equipment, and solar panel maker Kyocera (KYO).  Kyocera has a strong balance sheet flush with cash and investments, has remained profitable in the recession, and is targeting 15% profit growth for 2009.  After a lackluster earnings performance in 2008 that’s not the sexiest package in the market, but it deserves to trade at more than a 1.1 multiple to tangible book value, which means it should outperform CAPS S&P bogey from here.

Company description

In the U.S. Kyocera is probably best known for its acquisition of Qualcomm’s (QCOM) handset business, but the company is actually a manufacturer of much more. In addition to handsets Kyocera is a maker of office copiers, printers, telecommunications equipment, solar panels, fine cutlery, and other electronics in Japan. Of these businesses the applied ceramics, which include its solar panel offerings, and telecom equipment businesses are the steadiest performers.

Valuation

With a PE multiple of 45, Kyocera doesn’t immediately look cheap, but since Kyocera’s fiscal year ends in March that PE fully reflects business falling off a cliff after the Lehman Brothers meltdown and some one-time charges. What the P/E doesn’t tell you is how reasonably priced Kyocera is at an enterprise value-to-EBITDA multiple of 6.5 or how flush its balance sheet is with liquid assets. Of Kyocera’s $14 billion market cap, nearly $5 billion of it is in cash and another $3.1 billion is in the form of its 13% stake in KDDI, owner of Japan’s number two mobile carrier “au.” Along with these investments Kyocera has just $491 million in debt.

Kyocera isn’t a dynamic growth story, but many lower-quality companies have seen their shares run up in the past few months. That’s why Kyocera, at just 1.1 times its tangible book value, is a good bet to outperform the market once its valuation is reassessed by Mr. Market to something closer to its historical 1.5 times tangible book value too.