Steven Towns

Research analyst, newsletter provider, japanese micro & smaller caps, value
Steven Towns
Research analyst, newsletter provider, Japanese micro & smaller caps, value
Contributor since: 2006
Company: Uguisu Research, LLC
I don't believe it was mentioned, but a few years ago when I looked at EXC, I recall it having particularly large (and underfunded) pension liabilities. A quick search and here's some background on that from P&I.
I think the time to setup for a collapse-trade was when its shares had successfully run up 7-fold and the company became one of the most valuable in all of Japan. While I'm less bullish than I had been over the past couple years and no longer own a meaningful position, Nintendo has a fortress of a balance sheet and I believe will be at least moderately profitable, even on a much smaller operating scale.
Arguments about mgmt strategy (or lack thereof) and whether iPhone or droid or rivals' next-gen systems will kill Nintendo are not going to go away, but these neither flash a green light to short targeting a going-out-of-business [stock has already collapsed from peak; solid mostly cash balance sheet] nor on the flipside, an easy double [forex has improved, but missed opportunities to better market Wii U and intro higher-demand games earlier for Wii U/3DS]. Duly noted you mention looking for 21%-31% in your conclusion. But I don't think the risk/reward is so favorable.
Also don't think there's takeover risk, but should we see prolonged sub-Y10,000 share price such talk will come about, though MBO more likely. More near-term is a long awaited and anticipated stock split that needs to materialize asap -- recent heavy selling due to not being included in price-weighted N225. Unfortunate for Nintendo, yes, but more practically the US$ equivalent of $10K needed to buy a round lot of ordinaries also hurts demand.
NTT owns a majority stake in DCM. Amazing assets on NTT's balance sheet, however, note the GoJ (Min. of Finance that is) owns 30%+ of NTT.
IIJ pays a dividend twice a year. It recently increased its forecast fiscal year end (Mar. 31, 2013) dividend by 14% to JPY10/share. When paid out it will be reduced by half for IIJI holders to reflect the listing ratio, and it will be converted into US$, equal to roughly $0.0525 at present. Combined with its interim dividend, IIJ's dividend yield is around 0.80%.
Nothing to write home about, but this is a stock that has had significant appreciation and is a company increasing its dividend double-digits year-after-year. Gone it seems are the days one could buy IIJ sub-$10 let alone closer to $5. Share price volatility largely attributable to lack of float. U.S. hedge fund Joho Capital has been adding to its >5% position. Opportunistic profit taking by others, primarily traders, following upswings.
Note a down day in Tokyo combined with a lower yen would result in an even bigger daily loss in IIJI, which in turn could bring greater volatility back to Tokyo (3774).
Clemens, always great to see your comments. Some truly serious moves of late in real estate. As we both know, if this is the beginning, it is very early indeed for these stocks based on past bull markets. Apologies as I don't have the Japanese input setup on the laptop I'm using now -- best to you this year!
DXJ much better in very recent history than it historically had been with its liquidity. And certainly fares much better than EWJ when yen weakens. Personally, however, not a fan of the Japan indexes available to U.S. investors. Portfolios are far too diverse. If Nikkei doubles one might see a double, too, but I'm really focused primarily in small and mid caps looking for the best of valuations and solid growth prospects and/or solid recurring revenue models. Aiming for bigger returns. Hopefully less cyclicality. And considerably higher dividends meantime than the indexes.
Thanks for your comment. Shimano is obviously well-respected, and is a well-liked company among some value shops. It doesn't have the rock-bottom valuation associated with Japan but it is no slouch either in terms of ROE and its sound balance sheet. For all those Japan doubters, see link below for a 10-year chart.;c=
Indeed, "sum-of-the-parts ..." and Sony is coming up more and more over the past year. To its credit Sony did spinoff a good chunk of Sony Financial several years ago.
Thank you, Clemens, great to hear from you. I think we can all agree '13 is going to be very interesting with Abe take-2, BoJ seats in Apr., TSE-OSE ~July, lower-house election also July.
Hi sgxjdi, thanks for tracking down a copy of my book. Hopefully Amazon becomes more accessible in Singapore. Good comments, especially: "If we use only textbook knowledge, the world equity markets should not have come this far on such shaky ground anyway!"
While I agree the flush global liquidity ought to bode well for equities, I don't think cheap is necessarily just going to remain cheap in Japan sans foreign buying. Essentially lacking an equity culture, I think Japan has no choice but to start to embrace one. The mass under-valuation, deflationary environment, stable/solid cash flows, and rising dividends, all means it's a no-brainer for individuals and institutions alike to need to be investing in stocks much more. The arguments/worries about govt. debt/JGBs invariably follow among the Western crowd, but I continue to be unmoved. Japanese meanwhile are too focused on yield and forego significant upside chasing BRICs and REITs.
That's right. Some investors may have "missed" the interim dividend last autumn, which is unfortunate because Nintendo decided against paying one in light of its results/forecast. It will be making its fiscal year-end (FYE Mar '12) dividend payment.
Great to hear from you again and not surprised you're back in NTDOY. Really amazing how low "the market" is taking it. Mgmt clearly remains focused on product launch and business ops as opposed to stock price, which is generating more upset/concerned voices back home. I don't think mgmt listens to any overtures for value enhancement until macro quiets (ie yen eases; EU is key mkt and yen strength v euro renewed of late), and we're obviously not there yet. Meantime, I'm happy to scoop up more shares. Thanks, by the way, for picking up my book and I'm pleased that you're enjoying it -- means a lot!
Great start with due diligence. I'll be in touch later privately. Ping me if you don't hear from me after a few days.
Thanks, we're clearly in the minority, comfortably so in my case. I think you misunderstood me on the yen, however. I actually don't think it's so "dire," instead I'm telling everyone who will listen about the amazing profitability of co's despite its record strength. Truly amazing. Again, I am hardly worried about currency moves; and I agree that any "collapse" in the yen would obviously benefit Japan auto and the exporters assuming the reason for collapse was not say a simultaneous global collapse.
Regarding excess capital, it of course can signal limited or no prospect for growth, however, I don't think that's the case broadly speaking and instead it's more the culture and practice of mgmt. Ironically any "investments" in recent history of cash in JGBs, largely actually indirect, would have proven profitable ones. Of course I'd rather see more distribution to shareowners and we are seeing continual improvements in TSR. Not too worried about pension liabilities. Cash piles actually are growing or could grow if need be via FCF (for profitable co's).
Good luck there in Tokyo. Hope that you're enjoying your time and studies.
Indeed, thanks for your comment. It's too easy for investors/traders to make largely unfounded comments with such conviction about things that are highly elusive and often misleading. Of course futures and actual stocks will follow the lead and the herd if it's a fait accompli in the crowd's (institutional and individual) wisdom, but while all that's going on, there are great investments being overlooked.
That's true but also a blanket statement. I mention in the article I don't particularly like EWJ and knowing that I'm a value investor the basic reasons why should be obvious. Ditto for why I like Nintendo. Margin of safety in both quantity and quality of assets; the intangibles which effectively are being valued at zero. Very attractive valuation absurdly approaching liquidation levels ahead of a new console launch. I'll be writing more about Nintendo separately.
Interesting that you've chosen to put some money in Mizuho. And thanks for your comment. I am actually not so keen on the mega banks, more to do with what I think is likely limited upside compared to even the cyclical industrials, less so due to say any perceived risk surrounding JGBs.
As I alluded to above, and coming as no surprise, banking is intensely competitive both among the mega banks, vs i-banks, and the big banks in metropolitan areas. That said, Mizuho and others are lending and are always looking to expand business outside of Japan. The country's proximity to faster growing Asian economies is a plus, and along with the willingness to lend that you mentioned, it could bode well. Tactically, one concern might be any lending whether in Europe or in Asia could be early if there is to be any defaults in the EU or a recession in Asia.
As for information, I'd encourage you to read MFG's SEC Form 20-F, similar to the 10-K U.S. co's file. I'd also suggest looking around its IR site and checking out investor presentations and other materials. Having written a book on investing in Japan, I of course have leads and info that would be of interest, and thus if you're thinking of investing anymore in Japan or considering any investment funds, you might want to consider it.
Good point re. spinoffs. The Sony Financial spinoff several years ago was much hoped for and initially served well, but its stock price has been languishing in recent years. Still, Sony Financial has remained profitable (and it may in fact be the more interesting investment instead of Sony itself), and the sum of the parts (non-electronics) of Sony story have been tossed around more these days in the Japanese media. Pressure is obviously mounting ever higher. Since spinoffs are difficult in Japan from a tax standpoint and I wouldn't expect Sony to try and offload anything profitable in light of the poor shape of Electronics, especially in a down market. I would expect in the coming years for Japan to reform tax law surrounding spinoffs. Similar to how it eventually came around to enabling share repurchases.
Regarding my proxy proposal for which GE received no-action approval from the SEC: the context of my "supporting statement" is similar to my article above, calling out the dividend cut, the buyback and share count history, particularly '05 - '08, and GE's cash and equivalents. I have just typed the following so there may be typos. Only a print version exists.
My resolution read:
"The shareholders do not approve of GE's record of value-destroying share buybacks. Accordingly, and in light of our executives' own recognition of GE's "financial strength," "substantial cash generation," and "substantial cash on our balance sheet," the shareholders request the Board of Directors reexamine the company's dividend policy and consider special dividends as a means of returning excess cash to shareholders. This resolution does not ask the Board to cease repurchasing shares."
GE's planned statement of opposition (which it could have subsequently modified) should the SEC have disallowed GE's no-action request:
"Your Board of Directors recommends a vote AGAINST this proposal
Growing long-term shareowner value is a high priority to GE's Board and management. The Board regularly evaluates GE's capital allocation to ensure that it is consistent with this objective and appropriate in light of current business conditions. GE has paid a dividend each quarter for over one hundred years, and on December 9, 2011, the Board approved the fourth dividend increase in less than two years, from $0.15 to $0.17 per share. We design our distribution strategy to provide shareowners a regular cash income and to meet the company's anticipated needs for liquidity. GE believes that a strong liquidity position that supports a favorable credit rating serves the long-term best interests of the company and its shareowners by ensuring access to sufficient funding at acceptable costs to meet our business needs and financial obligations throughout business cycles. The Board actively reviews the company's liquidity position and strategy for the management of cash flows. These determinations are made within the context of our financial and strategic planning processes, which take into consideration a variety of factors, such as our operating commitments, capital allocation and growth objectives, including paying dividends, repurchasing shares, investing in research and development and acquiring industrial businesses. The Board has determined that GE's current cash flow strategy and shareowner distribution strategy supports the company's growth, provides flexibility in the deployment of available cash and maximizes shareowners' return on investment. We do not believe in these circumstances that a special dividend is warranted. Therefore, the Board recommends a vote AGAINST this proposal."
Given the volume of comments I am going to follow-up here rather than reply in-line. And thanks again for all the comments! At the end appears a clarification as concerns one item in the article; I will have it corrected by SA's editors. In a separate comment I will share my proposal and GE's statement of opposition as I mentioned in my comment earlier today.
Indeed, any shares held in a non-retirement account would be subject to tax on dividends. Nevertheless, the proceeds still exceed the best case scenario of 2 cents to EPS in 2013 even with a 15 multiplier.
No question there is material dilution by way of equity-linked compensation. Some of which is no doubt well-deserved, arguably for the non-senior-most employees. It is very much the truth as one commented that senior officers received tens of millions of not only low-priced but also irregularly timed options (to capture the single-digit share price) after the crisis. A shareowner proposal to clawback/forfeit those options was defeated.
No question either that GE is partially buying back stock because it perceives its shares to be undervalued. I argued recently in an article on SA that GE is significantly undervalued. But the conditions include that it stops wasting shareowner money and re-earns the trust of the so-called market. That GE Capital is resuming its dividend to the parent is great. Otherwise, the share buybacks are likely to continue to have limited effect because simultaneously obviously GE is repurchasing shares to offset its equity-linked compensation. Somehow GE has not been able to reduce share count meaningfully; compare that to IBM, another blue chip that utilizes sizable buybacks that has achieved both a higher share price and a much more meaningful share count reduction.
That this is an "angry article" is not a fair characterization. Instead the point is to raise awareness and highlight what has been going on. As a shareowner I have to hope management is acting in shareowners' best interests, ditto for the board. However, I question both, especially the board, whose job is to both steward shareowner value and hold management accountable. Current/former employees, sector analysts, and other professionals can more readily comment on GE's business operations. As I have done for the past three years, I reviewed again this year the directors up for reelection and continue to believe the board needs to be overhauled. Such articles can be found easily on SA.
***Clarification/corre... the last sentence in the italicized indented paragraph that contains figures about the buybacks. It is fairly trivial regarding what's unfortunately transpired in Q1: Share count INCREASED in Q1. GE disclosed buying back 3.334M shares at average cost of $19.18. I misread its cash flow statement that $127M was (what I thought) spent on buybacks. Obviously 3.334 x $19.18 does not equal $127M. The $127M figure appears to be the net cost reflecting monies received when options were exercised offset by the amount spent on buybacks. It seems to make sense if shares outstanding increased by 14 million, the monies received for exercising them may have been around $191M (which is $127M + the 3.334M shares repurchased x $19.18 avg price; hence $191M - $64M = $127M). Then, $191M for 14M options would have meant exercise prices of around $13.60/share. The bottom-line is that we are left with a larger number of shares outstanding.
Thank you, everyone, for your comments. I appreciate them all and I will be replying as soon as I get a chance. Meantime, an important fact not included above is that "shareowners" approved item #3 in this year's proxy! Also, later I will share my above-mentioned dividend policy (reconsideration) proposal and GE's planned statement of opposition it mailed me in advance of the SEC's ruling since the SEC was overwhelmed with no-action requests and GE's proxy printing deadline was rapidly approaching.
Excerpt (re. voting item #3) my pre-Annual Meeting proxy review:
3. GE wants your permission to increase the number of its shares issued by 425 million for compensation purposes. That represents around 4% of shares outstanding. It's important to consider voting AGAINST this proposal since what is certain to happen is that GE will also be trumpeting out a renewed share repurchase plan when its current one expires as it needs to continue to repurchase shares in order to try and keep a lid on their ever rising count. While some reporters and investors may cheer buybacks, the fact is the "market" knows better with GE. My own research shows GE has an impeccable record of value destruction by means of share repurchases.
Link to original proxy review:
Thanks, Jim. It would be great to see more shareowners writing proxy reviews. Your sharing of your votes and reasoning is also helpful. Really need more individuals and institutional investors to step up and become more engaged in their own right and with one another. The latter after all are managing the former's (our!) money.
Thanks for leaving this comment. I will contact you privately to see if we can figure out where your control number went. It's not impossible that it wasn't made easy to figure out how to vote online. I've even received printed proxy materials before that arrived on the day of a meeting and I live only a few hours from the proxy service company (unless of course they print and send from elsewhere). Anything is possible when it comes to proxies/VIFs.
I don't envy those trying to trade the collapse of the yen and the demise of Japan stories. In fact, I'd say it could arguably one of the most misinformed obvious trades. I'm biased, however, because I take a "value" approach to investing for one, and I have spent a significant amount of time living in Japan and also just published a book: Investing in Japan: There is no stock market as undervalued and as misunderstood. As you can see from the subtitle, it's a contrarian take to the mainstream reporting and conventional wisdom. I specifically discuss Kyle Bass and D. Einhorn's "bets." It's worth the money for my book to traders just to know what risks there are and factors at play beside the internally-funded argument that's finally become well known. Book link:
Thanks for the update, mostserene1. Like your last line.
Thank you for your article, too, TLF24. I'm consistently seeing similar sentiments each time around. Sad. But yes, hopefully a changing of the guard. That may be impossible given how entrenched they are, unless we get institutional vote support, so at least we'll hope for a change of mindset.
Thanks for your comment, Rwong8200.
Thanks, jimmy46, that could be true, who knows with GE Capital. The latest earnings report suggests continued improvements, record capital adequacy and RE now profitable. Even if dismissing value of GEC, GE's valuation looks compelling on its own, thus I used industrial comps.
Thank you, mostserene1. Never know if we'll see a $15 type pps again, but GE's not exactly off to the races post-earnings, either. Final vote results are supposed to be published within four business days after the AGM. We'll see if there's an improvement over last year, which was disappointing (wrt AGAINST tallies).
Thanks for chiming in, Smurf.
Thanks, mjk0259. Please share the link if you have it. I'll fish around for it when I get a chance, if not. Probably should share a copy with IR and the board, too.
Nice, good one, TwistTie!