Whither Japan Stocks: Toyota, Nomura, Daiwa, Softbank, And Japan McDonald’s – Forbes

Posted: Friday, December 27, 2013

On the seventh consecutive day of rises, the Nikkei 225 average closed on December 26 up 164 yen at 16,174, driven

English: The mdonalds logo from the late 90s

English: The mdonalds logo from the late 90s (Photo credit: Wikipedia)

particularly by a continually weakening yen, trading as I write at JPY 104.70-72 against the U.S. dollar. The index is now at a six year high. This despite the bombshell news during the morning session that Prime Minister Abe Shinzo had made observances at the Yasukuni Shrine, an act certain to roil political relations and affect business with China and Korea.

Holders of Japanese shares are feeling flush. The big question is how long the good times can roll. Below we look the recent performance and prospects of a number of the Nikkei stocks, most of which can be bought as ADRs. Full disclosure: I hold small amounts of Toyota (NYSE:TM) and Nomura (NYSE:NMR).

Market talk in Tokyo on the 26th was less on the Nikkei’s new high, but on the broader TOPIX index which reached a high for the year. The TOPIX tends to lag behind the blue chip heavy Nikkei.  Its rise indicates that investors are expanding their portfolios by looking beyond the biggest and most liquid company shares.

Abenomics’ success at weakening the yen has been a boon to Japan’s automakers.  On Thursday all automakers’ stocks rose. Mazda (OTC:MZDAF) was up 4%, while Fuji Heavy Industries (OTC:FUJHY) reached a new high. Some analysts are cautioning that domestic auto sales are enjoying an unsustainable surge as consumers buy before the April 1 3 percentage points rise in the consumption tax.  Others, expecting further yen weakening ahead as U.S. dollar and Japanese yen net interest differentials widen, will be buyers if stock prices decline.

Toyota rose 2.9% or 180 yen to 6,340. TM’s YTD high is 6,760 yen reached on May 23, and its low 4,030 yen set on January 9. Today, the company’s price-to-book (PBR) ratio is 1.8 times, and its forward (to financial yearend 3/31/14) price-earnings ratio (PER) is 13 times. Suggesting that there is still upside in TM, the forecast dividend yield is 2.3% (especially attractive for Japanese investors) and a forecast EPS yield of 7.6%.

I have previously noted that Abenomics’ “first arrow” massive QE monetary stimulus is partly about punishing Japan’s frugal households by engineering negative real interest rates on savings, in response to which households should either spend more or reallocate savings to higher yielding equities. A year into Bank of Japan governor Kuroda’s regime, the strategy seems to be having the desired effect, to the benefit in particular of retail securities firms like Nomura and Daiwa (OTC:DSEEY), as well as the banks.

Daiwa jumped 5.5%, or 55 yen to 1,056 yen, in Tokyo on the 26th, and is up more than 6% in the OTC market as I write. This is up from a YTD low of 434 yen set on January 17. Daiwa’s PBR is 2.03 times, and forecast PER 11.55 times. The forecast dividend yield and EPS yield are 3.22% and 8.66% respectively.

In a second place lineup similar to that of Sumitomo Mitsui Financial Group (NYSE:SMFG) versus the industry leader Mitsubishi Tokyo UFJ Financial Group (NYSE: MTU), Daiwa Securities is a tier under industry leader Nomura, but is in many ways a better stock (demonstrably better managed, fewer downside surprises).

Nomura also rose sharply, up 4.7%, on the 26th closing at 774 yen. This is well off its YTD high of 980 yen set on May 22. Nomura’s PBR is 1.34 times and forecast PER 15 times. The forecast dividend yield is 1.99% and forecast EPS yield is 6.65%.

Both Daiwa and Nomura, and many smaller securities firms and banks will be increasing business as individuals are permitted from January 1 to open tax-free NISA (Nippon Individual Savings Accounts) accounts. Brokers expect NISAs, modelled on Britain’s Individual Saving Account, to be vehicles for selling and trading equities and mutual funds to a new, broader market segment.

Another big winner in Thursday’s market was Softbank (OTC:SFTBY), up 3.4% to a YTD high close of 9,070 yen.  This from a YTD low of 2,882 yen set on January 24. Apart from faith in CEO Masayoshi Son’s Midas touch in the acquisition of Sprint (NYSE:S), the market was welcoming news that Son could be planning an acquisition of T-Mobile (NYSE:TMUS).

Softbank stock’s PBR is 6.9 times and forecast PER 24.2 times. Forecast dividend yield is 0.44% and forecast EPS yield is 4.13%. Hardly stellar now, but as U.S. private equity firm Third Point LLC CEO Dan Loeb said last month, after announcing a $1 billion stake in Softbank, Masayoshi Son has been one of the world’s most reliable value producers. Softbank is a strong speculative buy.

I close with an update of a previous post on Japan McDonald’s and its new gaijin CEO, a Canadian, Sarah Casanova (48). On December 18 the company shocked the market by announcing that full year profits would fall 57% below previous forecasts. At the time the company stock (50% owned by McDonald’s headquarters) was at about 2,800 yen. By December 24 it had dropped to 2,700.

On Christmas Day Casanova appeared on TV promoting some new (heavy on the protein and cholesterol, or alternatively chicken and honey mustard) menu offerings by which the company hopes to win back flagging business. I think Japan McDonald’s may still be missing trends among its target demographics. In an up market, Japan McDonald’s dropped a further 16 yen, or 0.6%, to 2,645. The PBR is 2.06 times, the forecast PER 70 times, the forecast dividend yield 1.13% and forecast EPS yield 1.42%.

It is an old saw that the path to wealth is eating at McDonald’s, not investing in it. Seems like good advice in the Japanese market.


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