Nomura Holdings Inc. (NMR) is a predominantly Japanese financial services company that is trying to increase its operations internationally. Please note that NMR’s fiscal year 2011 ended on March 31. It's currently in Q1 of 2012 and will report quarterly results in late July or early August.
NMR operates in three business segments: Retail, Asset Management, and Wholesale (which includes Investment Banking, Equity and Fixed Income trading). I, along with a much smarter gentleman than myself (Doug Kass), believe NMR represents a good value for longterm-oriented investors who are willing to tolerate some volatility in share price because the stock is inexpensive and earnings will grow significantly in 2012.
NMR’s, along with almost all other financial services companies’, shares have performed terribly over the past year. A year ago, shares were trading a little over $6 and now are trading under $5. Earnings for 2011 were depressed due to NMR reducing its risk in Europe at the same time the Greek and other crises were happening. This resulted in very poor performance for the Wholesale segment in both Q1 2011 and Q2 2011.
The true earnings potential of the company began to show in Q3 and Q4, when the wholesale business started meaningfully contributing to earnings. If Q4 was a representative quarter for NMR, then pretax earnings will be roughly 11 yen/share or $0.14/share per quarter. This translates to a stock trading at 8.75x forward, pretax earnings. Additionally, the shares are trading at 0.7x book value and currently have a dividend yield of 2%. Financial services companies’ shares rarely fall below 0.7x book value unless the company is in serious distress, and while NMR's performance has certainly not been stellar, eight consecutive, profitable quarters hardly points to a company in distress.
Information I will present can be found here. In 2011, NMR had total revenue of 1,130 Billion Yen ($13.95 Billion). Total revenue breaks down to be 35% Retail, 7% Asset Management, 56% Wholesale, and 4% Other. Both Retail and Asset Management have been experiencing modest growth with very little earnings volatility, and it looks like that will continue in 2012.
The main problem for NMR is its Wholesale business, which seems to have finally been fixed. In 2009 and 2010, NMR struggled to integrate the European and Asian units of Lehman Brothers that it bought after the 2008 bankruptcy. NMR offered retention bonuses to ex-Lehman employees, which increased compensation expenses more than it increased revenue. Also, there was a generally poor cultural fit between the two companies. In 2011, the problem was the European debt crisis coupled with a slight change of strategy to a more customer-centered institution rather than a proprietary institution.
It finally looks like 2012 will be the year when everything comes together for the Wholesale division of NMR. Revenues are increasing inside Japan as well as the rest of the world. While Japan still makes up 60% of its revenue, geographic diversification will continue in 2012. Wholesale is more dependent on client flows than on trading for its revenue. This will decrease the probability of large losses, which negatively impacted performance since 2009.
Also, Investment Banking has picked up recently, which will be an incremental positive for NMR. The earthquake in Japan seems to have little negative impact on activity for NMR, and the possible stimulus along with ample liquidity will also be a positive for NMR’s results.
I think shares of NMR can see $6.50 within the next nine months, so I think a patient investor can feel confident buying a small position in NMR under $5. If Q1 2012 results show more problems in the Wholesale segment, I would sell this position because that will tell me there is no clear direction for this segment and it will continue to struggle in the future – bringing the entire company’s results down with it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NMR over the next 72 hours.