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Subaru's Decade Of Strong Performance Has Left The Share Price Depressed: A Recipe For Outsized Future Returns

Mar. 03, 2021 9:28 AM ETSubaru Corporation (FUJHY), FUJHF14 Comments
Daniël Tacken profile picture
Daniël Tacken


  • Subaru has grown substantially between 2010 and 2020.
  • The company is relatively small but has some key technological advantages and a strong branding strategy.
  • Subaru has a history of strong financial performance.
  • Vehicle quality issues in 2018 and 2019 and the global pandemic have left the share price depressed as profits have declined.
  • With a large net cash position, an excellent history of free cash flow generation and sales growth, Subaru is very undervalued with limited downside risk.

With markets at all-time highs, value stocks are becoming harder and harder to find. Especially in the United States. However, abroad there are still some bargains to be found. Investors who are mainly interested in American companies but can't find undervalued businesses to invest in are the key audience for this article.

I will discuss Subaru, the Japanese car manufacturer that has a higher percentage of its sales from the U.S. than any of the 'American big three' car companies. More than 70% of Subaru's cars are sold in the U.S. On top of that, I belief Subaru is very undervalued. I argue that value investors who are looking for "American" companies should consider Subaru.

In this article I will first discuss Subaru's business and its strengths and weaknesses. Secondly, we will look at the financials of the company. Lastly, I will discuss Subaru's valuation and why I think it is undervalued.

Subaru: Being a small player has its advantages

Subaru is first and foremost a car manufacturer. Secondly, it also operates an Aerospace company that mainly builds defense helicopters and makes parts for Boeing's 777x and 787 airliners. With only 4.2% of revenue being derived from the Aerospace segment, which is only marginally profitable, it is of minor importance to this investment thesis.

The automotive business is Subaru's core operation and the area of focus for this article. While it accounts for more than 95% of Subaru's sales, Subaru sells a tiny number of cars each year compared to almost any other car company. With around 1 million units sold in 2019 globally, Subaru is not even in the top 20. However, as more than 700.000 of these units are sold in the U.S., Subaru was the 8th largest brand there in 2019 (although Hyundai and Kia will most

This article was written by

Daniël Tacken profile picture
Hello everyone! I am Daniël, a 25 year old Dutch graduate in Political Economy. In 2021 I immigrated to the United States. I have always been fascinated by investing and the stock market. In the summer of 2017 I stumbled upon Ben Grahams "The Intelligent Investor" and since then I have really started my journey of becoming a proper value investor. I hope you will enjoy my articles and that I can contribute a little to this great investors platform.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FUJHY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (14)

Subaru makes great cars but as an investor I am not sure whether it is even worth considering. There are several factors working against it.

1) there is no sales growth catalyst
2) it has almost no EV offerings and will have to face stiff competition when it does have some
3) Yes, it is cash rich but no catalyst for growth. Where will the future sales growth come from? In that sense, it provides false sense of value. People invest in a company not because it has lot of cash lying around but how well the management is able to deploy that capital to generate ROI. In that sense, I do not see any visibility in its current line up of product offerings. Having said that, I am impressed by the discipline the management has showed in deploying the capital. I hope I am right but so far nothing from management about its plans for the future. Until there is visibility in this front stock price will languish.
4) potential investor should also factor in the trading cost as it is traded on OTC and foreign taxes on dividends. I’m not sure if it’s ADR pays dividends. Even if it does, consider high Japanese taxes taken at source, ADR fees etc.
5) Subaru vehicles GENERALLY cost more to insure and maintain/service, lower efficiency in fuel consumption in comparison to Toyota, Honda etc. so it hurts their appeal to car buyers.
5) Toyota could absorb both Subaru and Mazda as both probably have valuable patents but as a stand alone company would be hard to invest in. Investing in Toyota as a proxy for both companies would be safer.
6) Major brokerage houses rate Subaru as underweight for investment
Risk0 profile picture
Actually I owned Mazda and switched to Subaru, precisely because it ran up but wondered as I hadn't done enough research on Electric. Also Mazda latest products seem to b well received
I observe generally it seems possible (not easy) to find japanese companies with cash and low EV... Nikon last year.... Keep up the good work! Ty @Daniel @John - is as is
Thank you for the good article. Are you considering semiconductor shortage Subaru is experiencing? Seems like Subaru is cutting down production by 40% or so.
6.6% production cut is what I last read. This includes shipping container shortage. Do you have something more recent?

@John - is as is My bad, I think you're right. I read the digits wrong.
Daniël Tacken profile picture
@aaaaaff12334 thanks for the reply! I did consider this for my article, but decided to not include it because of the following
The production cut is indeed 6.6% for 2021 as @John - is as is pointed out. As my thesis is mainly a long-term bull thesis on Subaru, the performance of 2021 is of relatively limited significance for my article. Of course it is better if Subaru did not have the shortage, but I don't think it impairs the long-term bull cash which I belief will most likely play out 2022 onwards. 

I think it is very hard to make any good guess on Subaru's results for 2021 (which falls mostly in fiscal 2022) due to the pandemic, this issue and the remaining quality problems that is getting fixed.

Therefore, I don't expect much from the coming year. Subaru has proven to be able to withstand 2020 well, so there is no reason to belief 2021 will be worse. My main bullish arguments are all based on normalizing sales and earnings from 2022 onwards.

I hope I have clarified my position!
Thanks for your great article. Since 1976 I have been buying Subaru's and is my favorite car. Presently, I own two Outbacks, a 2017 and a 2019 and we are very happy to have them. As you said every 10 years are do to be change...thanks to Subaru for their great card.
Risk0 profile picture
ty for note v comprehensive & well researched. as u say easier to find value o/s. i was comparing mazda to subaru, & on a P/B & ev/ sales, Mazda may just have the edge. Plus, it seems to have price momentum & most importantly its launching EV. How is subaru for electric? Presumably the boxer needs replacing esp to appeal to green subaru lovers/
also for sake of history, could u explain the crazy share price upwards move 2012-2013 + 300% or am I reading chart wrong? couldn't understand why it catapulted upwards.
I don't mean to speak for Daniel. Hopefully, he'll chime in. Here's my take:
When Subaru stock dropped recently, I revisited Subaru, Mazda, and Nissan, though I didn't dig very deep. With the exception of Toyota, they are all still in stock price recovery mode right now. Arguments can easily be made for/against any of these companies. For me, Subaru has seen the least love from investors in 2020 despite all the positives noted in this article and others on SA. I'm hoping investors will come around and push the stock value up in line with the auto industry competitors. Basically, I'm hoping that I jumped in pre-momentum. Mazda is improving and certainly has upside as well. I think I would have been happy splitting my investment between the two had I chosen to do so.

EV concerned me too. It's kind of a mixed bag in my mind. I would expect the core Subaru following to be increasingly against ICE vehicles. On the other hand, if you are driving off into the mountains somewhere, hybrids (which they do offer) are a better bet for now. I am comforted that they are teaming up with Toyota going forward on that front instead of developing completely new concepts on their own. It is also a positive in my mind that Toyota has 20% ownership in Subaru vs 5% in Mazda.

I'm not sure what happened in 2012-2013 (aside from US election, fed reserve support, stock market and housing in general shooting up). I wasn't following the auto industry at the time. Mazda, Toyota, and Subaru all saw big gains from 2012 lows though. Mazda jumped up just as much as Subaru.
Daniël Tacken profile picture
@Risk0 Thank you for the reply! I must admit that I have not looked into Mazda at all. I just had a quick look at their financials and these were the main things that stood out to me:
Mazda does not have a net cash position right now (debt/cash is roughly even) compared to Subaru.
Mazda has doubled its share count over the last decade. I don't know the reason for this, but it is generally not a great sign.
Mazda's cash flow performance is decidedly worse than Subaru. Especially if you know that sales of both companies are roughly even.

On the quality front I think Mazda also makes great cars. They have similar line-up to Subaru in that it is relatively small but well executed. Their interiors and driving experience are top-class for their segments.

I might delve a bit deeper into Mazda, but these would be my quick take-aways.

With regard to the EV development for Subaru, read the last part of the article and check the CSR report, Subaru detailed explanations there. For now the Boxer engine is staying in all PHEV's and Hybrid's Subaru is going to make. For full EV they will have to replace it most likely, but they have plenty of time to find a proper solution for this.

Lastly, I don't know specifically why the share price increased so dramatically during 2012-2013. My best guess would be that it is basically investors being overly bullish as those were the years Subaru's financial performance really improved a lot coming out of the Great Recession. Just as investors are too negative rn in my opinion, they were overly optimistic about improving results back then. I think it is a nice reminder that the current pessimism is not a given. Sentiment can change quickly.

Note: I have no idea why my reaction is printed in bold ;)
Risk0 profile picture
@John - is as is ty 4 well considered response. I don't think the other autos climbed as much 2012,i was just trying to get an idea of whether this is the low or an inflated baseline. The EV does concern me as improving rapidly, soon all others will have
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