The August 21 issue of Nikkei Money, a magazine on Japanese investing, had a poll of individual investors regarding their views of the Japanese market and promising stocks. Of the names investors are paying most attention to now, the number-one choice was somewhat surprising. Leading such internationally known blue-chip companies like Toyota (NYSE:TM), Sony (NYSE:SNE), and Honda (NYSE:HMC) was Tokyo Electric Power, or TEPCO (OTCPK:TKECF), the normally stable (and boring) utility that supplies 30% of Japan's electric power.
A poll of individual investors may not be the best authority for stock selection. However, in this case, especially for long-term oriented investors, the current price of TEPCO justifies consideration. After more than doubling in price over the past four years, the stock nosedived last month after the 6.7 magnitude Niigata earthquake hit the company's Kashiwazaki-Kawari nuclear plant, leaving it inoperable at least for a few months.
In its July 31 release of 1Q 2008 results (ended June), TEPCO estimated the damage from the incident to be around Y282 billion and revised its March 2008 net profit estimate downward from Y310 billion to Y65 billion (or Y230 to Y48 on a per share basis.) The financial damage was so extensive because, in addition to paying for repairs, TEPCO will be forced to replace the lost energy through alternative sources that are expensive due to high oil prices. On August 16, the stock reached a calendar 2007 low of Y2,965, compared with a five-year high of Y4,530 in February.
However, investors seem to think the worst is over. At a price of Y3,080 as of 9/3, the P/E based on 3/2007 net is about 14, and the valuation based on the previous, pre-earthquake estimate is 13.2, as compared with the sector average of 23.4. Worst-case scenarios add virtually no risk: this quasi-public supplier of 30% of Japan's power won't be allowed to go out of business, and it has sufficient liquidity and funding sources to turn to. On August 9, Moody's rated TEPCO's bonds Aa2 and said it didn't see any impact on the Company's credit rating from the plant damage. While TEPCO hasn't released the estimated re-start date of the plant yet, over the medium- to long-term we expect profit levels to return to the prior-year level and the trend of steady growth to continue, which should be reflected in the stock price.
Note: Bob Schneider co-wrote this article