Seeking Alpha
Long/short equity, short only, growth, special situations
Profile| Send Message|
( followers)  

I have a friend who’s a fund analyst at Wilshire Associates, one of the biggest investment consulting firms in the world. His job is to research and analyze funds for investment suitability so he speaks to and interviews portfolio managers all the time. A couple of days ago he mentioned he’s generally been hearing around the firm and from some money managers that prospects are looking good for Japan right now. “Japan is cheap following a two decade slump,” he says. He also said shipments to China from Japan are improving.

Japan’s GDP grew 4% in 2010, the highest since 1990. Its growth is projected to slow to 2% in 2011. The yen appreciated in value against the US dollar and euro which is a sign of inherent strength – Japan’s growth is real, not due to inflation. Unemployment is currently only 5% in Japan, and is expected to decrease to 4.7% later this year. From my research, I’ve noticed that Japanese stocks in general are undervalued right now. The Tokyo Stock exchange is still 20% below its peak before the financial crisis hit in 2008.

If you want to just get returns from an overall rise in Japanese stocks, you can invest in an index ETF that is a good representation of Japan’s economy. EWJ and ITF are two established Japanese ETFs that I’d recommend.

A third fund to look at is the Japan Equity Fund (NYSE:JEQ), a closed-end fund. It’s an established fund that’s been around for 19 years, with 102M assets under management. Its holdings are companies from the Tokyo Stock Exchange (TSE) and Japanese stock exchange. JEQ is currently trading at an 8% discount. I’ve noticed that with closed-end funds, when the holdings are assets that are favorable, the discount gets smaller. When the holdings are out of favor, the discount gets larger. So if Japan stocks become more favorable this year, JEQ will rise in two ways: its net asset value will increase and the discount will decrease.

After researching various Japanese companies that trade on US exchanges, two stocks stood out for me as having lots of room for growth. They are: KYO and KUB.

Kubota Corp (NYSE: KUB)

Kubota Corp is Japan’s version of Caterpillar, Inc (NYSE:CAT). If one wants to invest in Japan’s growth and take advantage of the global rise in food prices at the same time, KUB is the play. For 2010, most of its revenues came from Japan which represented about 50% of the total. Revenues from other countries in Asia totaled 18%, and revenues from North America totaled 20%. Farm and Industrial machinery sales represented 72% of its revenue in 2010.

KUB’s anticipated total net income for the 12 months ending March 31, 2011 grew 22.9% from the same period last year. Revenue growth in the same period: 3.2%. KUB has done a great job at reducing costs.

Increases in revenues of Farm and Industrial Machinery compensated declines of revenues in other segments. The company’s Water & Environmental Systems segment represented 18.7% of its revenue, and it decreased by 16.2% while its social infrastructure products sales also decreased.

Revenues in Asia, which is mostly China, increased 10%, in North America increased 5%, and revenues decreased in Japan by 4%. This decrease in Japan was partially caused by a decrease in the price of rice in 2010.

Kubota’s President, Yasuo Masumoto, said overseas business development in Asia, primarily China, is the company’s priority for 2011. KUB’s approach for growing its agriculture machinery business in Asia is to focus on the market for rice cultivation. Many commodities experts, like Jim Rogers, expect rice to rise in price in 2011 as noted in this article. Even if rice doesn’t go up in 2011, KUB should still go up.

But if rice prices end up increasing, that would be even better for KUB as companies that cultivate rice paddies in China will buy more machines and equipment from KUB for faster rice production. I believe rice will go up this year, following the hike of other foods like wheat and sugar. The following are charts from May 2010 to the present.

Rice


Source: futures.tradingcharts.com

Wheat

click to enlarge

Source: futures.tradingcharts.com

Sugar

click to enlarge

Source: futures.tradingcharts.com

KUB is also focusing on expanding its water treatment and environmental market in China, which should also be a big growth business as China develops more efficient and cleaner water systems.

Kubota’s financial ratios look good compared to its American competitors Deere (NYSE:DE) and Caterpillar.

KUB

CAT

DE

P/E

18.71

24.6

18.38

P/S

1.09

1.53

1.39

P/B

1.61

6.03

5.78

Kyocera (NYSE: KYO)

Kyocera provides components and equipment for communications and power generators, and various electronic devices. Its different business segments are well diversified and that’s good for steady, controlled, growth. KYO had a great performance in 2010. For the 9 months ended December 31, 2010, net sales rose by 24.4%, or 188 billion yen, compared with the same period in 2009. Sales increased between 27-30% for these locations: Japan, USA, and Asia. This is because of high economic recovery in 2010 in these locations. Kyocera had increased sales and profits in every one of its business segments.

In addition to increased sales, the company’s efforts to reduce costs and improve productivity in each business resulted in a huge profit improvement. Operating profit rose by 81.8 billion yen or 215% from the same period in 2009. For that same period, pretax income rose 307% from 32.7 billion Yen to 133.1 billion Yen. It had especially strong growth in its components business from those used in digital consumer equipment, industrial machinery, and automobiles. Its solar cells and modules had strong demand mainly because of government subsidies in Japan and overseas. Kyocera expanded production capacity for that segment.

In my opinion, the market didn’t give KYO enough credit for its incredible growth in 2010, and it doesn’t show any signs of slowing down. KYO has a PE of only 13.5. It’s cash rich with $5.88 billion in cash, which is 30% of its market cap and only $1.22 billion in debt. It has a P/BV of only 1.13. KYO is a great growth and value stock, and definitely worth looking into.

Disclosure: I am long KUB, KYO.

Source: Undervalued Japanese Stocks: 2 to Consider