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Today I am reviewing Jinpan International (NASDAQ:JST) after looking at Guru Focus’ latest “Buffett Munger” newsletter in which they analyze MDT which I have recently reviewed as well as JST.

JST is one of the world's largest producers of cast resin transformers and related electrical equipment and is one of two UL certified cast resin transformers in the world. These are vital in the distribution of electricity and are used in a wide range of applications from factories and refineries to power plants, airports, and even high rise apartment buildings.

Over the last month, JST has been trading between $10 and $20.

Please refer to the sto review explained post if you have questions on what I look for in this analysis. Click on this Surfmark link if you want to see the source data for this review.

1- Business Performance Risk (-) and intrinsic returns (=)

Metric

Status

FCF / Sales

Last twelve months: 15%, higher than in previous 10 years, which included 3 negative FCF years

ROE

LTM: 14.5%, lower than the company's average over the last 5 years of 19.8%, in line with company's experience between 2000 and 2006

ROA

LTM:10.1%, lower than the average over the last 5 years of 13.4%

Revenue Growth

On a LTM basis, JST has declined quite significantly, with revenues coming down 10% after a flat 2009! This is a large contrast to JST's experience in previous years with 20%+ growth, year over year

Cash distribution to shareholders

JST does not pay a dividend a meaningful dividend (0.5 and has been increasing its number of shares outstanding!

While JST’s cash generation and returns look promising (although ROA is a bit low for my taste), recent negative growth and the lack of dividend combined with the increase in shares makes me question the company’s ability to deliver returns to shareholders. As the company seems to keep all its earnings, I was expecting to see an increase in cash which is not really the case as the compnay’s receivalbles and inventories have shot up in recent years and quarters!

In terms of intrinsic returns:

- The company pays a 0.5% dividend yield on a payout ratio of 6%!

- Growth is tricky to evaluate given the current situation. I will use GuruFocus’ 5% as a base case, which should – based on a ROE of 15% consume 33% of JST’s earnings

- JST could use its excess cash to buyback shares (that is if working capital comes under control). With an earnings yield of 8.5% and 60% of earnings available, JST could buy back 5% of its shares.

Putting it all together JST’s intrinsic returns could be slightly over 10%, depending on actual growth rates.

2- Balance Sheet Risk (+)

Metric

Status

LT Debt / Equity

JST does not carry any debt

Current Ratio

Current ratio: 3.1x, well above what would get me nervous

JST’s balance sheet is conservative, with no debt and a high current ratio

3- Valuation Risk (+)

Metric

Status

Cash Return

10.8%

P/E

JST currently trades at 11.7x, not too far from its 5-years average of 12.8x. Note that EPS fell from $1.78 last year to $1.14 on a TTM basis

JST’s current valuation metrics appear conservative, with a P/E below 12x and a cash return in excess of 10%.

Conclusion

While I understand, looking at JST’s balance sheet and valuation while the company could be attractive, I have some lingering doubts about the business: JST’s sales have been declining on a last twelve month basis and earnings have been dropping quite fast…but for now this has not been yet reflected in FCF. In addition, JST’s days receivables and inventories have shot up, making me wonder if – in order to not show too much decline in sales – the company has been doing some channel stuffing. All in all I have too many doubts at this point to feel comfortable with the stock and will not perform a more detailed analysis of JST.

Have you looked at JST in the past? What was your conclusion?

Many happy returns!

Ben

http://marginofsafetyinvesting.com

Author's Disclosure: No position

Source: What's Going On With Jinpan International?