9776.JP - Sapporo Clinical Laboratory Inc

[west]

Day #2 of ?? with these Japan stock posts.

 

Sapporo Clinical Labs description from the Financial Times:

 

SAPPORO CLINICAL LABORATORY INC. is a Japan-based company mainly engaged in the dispensing pharmacy business. The Company has four business segments. The Clinical Testing segment is engaged in the clinical testing needed in medical examinations of hospitals and other institutions. The Dispensing Pharmacy segment operates its 37 dispensing pharmacies and principally sells drugs and medicines. The Medical Equipment Sale and Maintenance segment is engaged in the sale, repair and maintenance of high level medical equipment, general medical equipment, as well as physics and chemistry equipment. The Others segment is engaged in the development, sale and maintenance of software, such as clinical testing systems.

 

The numbers:

 

Cash makes up over 80% of the firm's current market cap.

 

EV/TTM EBIT - 0.50x

EV/TTM EBITDA - 0.41x

ROIC - Using Greenblatt's approach has been about 27% over the last four years on average with very low variability.

 

P/B - 0.55x

BVPS Growth has averaged 8.5% a year on average over the last four years.

 

Cash collection cycle has gone down from 11 days four years ago to 3.7 days (!) last year.

 

Comps for the industry (Healthcare Services) give me an upside of:

 

EV/EBIT for the Industry in Japan: 10.00x

Upside to fair value with cash valued as an operating asset: 131.7%

Upside to fair value with cash valued as cash: 1613.5%

 

EV/EBITDA for the Industry in Japan: 6.55x

Upside to fair value with cash valued as an operating asset: 114.2%

Upside to fair value with cash valued as cash: 1483.9%

 

P/B for the Industry in Japan: 1.02x

Upside to fair value: 86.8%

 

EV/S for the Industry in Japan: 0.16x

Upside to fair value with cash valued as an operating asset: -28.1%

Upside to fair value with cash valued as cash: 432.0%

 

Enjoy!

[lathinker]

Thank you for posting another interesting idea.

I have to admit that I havenot yet invested in Japan, but seriously consider starting a portfolio of 15-20 net-net stocks. While the concept is pretty simple it appears to work very well. Also, it is interesting to see there are still no many opportunities in Japanese small and micro caps, may be due to the fact that many investors got discouraged by the long term track record of the Japanese market.

 

What do you use for screening? Seems a bit like you check for financials on Bloomberg Businessweek. Being a non-professional, I looked at Damoradan's spreadsheet and filtered for certain criteria which enables me to get to a list of stocks which include yours. The data is not 100% up-to-date (January 2014), but still useful.

 

I would be interested in learning other methods to approach the topic.

 

lathinker

 

 

[LC]

West, thanks :D

 

Also: Do high cash balances give you pause? I.e. that management will make poor capital allocation decisions?

[jeremykgold]

The cash balances are what stump me. If they're not going to increase return to shareholders, why is there a case for margin expansion?

[west]

Yes, cash balances give me a big pause.  See Charle (JP:9885), a company with great historic ROIC trading at less than its cash balance.  However, since it's cash balance is so high, its effective ROE is in the low single digits.  I do not have money in them because I don't see what the catalyst will be.  Maybe if I could read their filings I could understand where potential change might come from, but since I can't, I can only speculate that the company will one day trade at above cash levels.

 

Still... not a bad bet.  But not for me.

 

Most of the companies I post have either relatively lower cash balances or have such a great business that it shines through the cash drag.  I mean, look at this company.  Cash makes up 80%+ of its market cap, but it still has a P/E of about 8.  And earnings have been increasing year after year.

 

On the screener, I hate to say it, but I developed my (very non-tech user unfriendly) own.  I think most free (and many non-free) screeners are worthless if you want to look beyond top level data.

 

So my screening methodology is pretty much a black box...

 

[LC]

Thanks for the response. Just curious, where do you pull your data from?

[west]

I have one script that scrapes MSN Money for top level data.  All of that data, for every company in the Nikkei (that doesn't have errors), gets dumped into a data file, which then I run scripts to get sort of second level data.  That second level data then gets dumped into a spreadsheet which I go through by hand to find companies.  Because of the layout of the spreadsheet, this is actually a very, very easy thing to do.  It takes about 5 to 10 seconds to look at each company in the spreadsheet and see if it's worth investigating.

 

Unfortunately, the quality of MSN's data has gone way down in the last year.  (I have no idea what happened.)  So in the last few months I wrote a second script to rip data off the Financial Times website as well.  Because they limit the number of companies you can look at in a month, I only scrape FT for the companies that I found in the MSN Money/spreadsheet step mentioned above.

 

So I scrape from MSN Money first.  And then Financial Times.

 

I figure the nice thing about going to two data sources is it double checks that they both have the same data.

[LC]

very cool. thx for satisfying my curiosity about the data integrity.

[Picasso]

I have one script that scrapes MSN Money for top level data.  All of that data, for every company in the Nikkei (that doesn't have errors), gets dumped into a data file, which then I run scripts to get sort of second level data.  That second level data then gets dumped into a spreadsheet which I go through by hand to find companies.  Because of the layout of the spreadsheet, this is actually a very, very easy thing to do.  It takes about 5 to 10 seconds to look at each company in the spreadsheet and see if it's worth investigating.

 

Unfortunately, the quality of MSN's data has gone way down in the last year.  (I have no idea what happened.)  So in the last few months I wrote a second script to rip data off the Financial Times website as well.  Because they limit the number of companies you can look at in a month, I only scrape FT for the companies that I found in the MSN Money/spreadsheet step mentioned above.

 

So I scrape from MSN Money first.  And then Financial Times.

 

I figure the nice thing about going to two data sources is it double checks that they both have the same data.

 

If you ever need help running your screeners through a Bloomberg terminal, let me know.  I will probably be doing a similar approach to yours so it would be of interest to me as well.

[west]

I visited Bloomberg's office in San Francisco and briefly got to use one of their terminals.  It seemed pretty neat, but I don't think it lets me do fancier things like define my own definition of ROIC and, say, normalize it over the last five years while also outputting the standard deviation of the value?

 

Still, I'd love to see what I could do with one and what its limits are if you're offering access.  Shoot me a PM :)

 

[NormR]

I visited Bloomberg's office in San Francisco and briefly got to use one of their terminals.  It seemed pretty neat, but I don't think it lets me do fancier things like define my own definition of ROIC and, say, normalize it over the last five years while also outputting the standard deviation of the value?

 

Yes it will, you just have to define some custom data points / functions.  The ~$2k/month cost is a bit much for most people tho.

[frommi]

So I scrape from MSN Money first.  And then Financial Times.

 

I figure the nice thing about going to two data sources is it double checks that they both have the same data.

 

I think i checked nearly every one of your ideas on morningstar and wsj.com and with my forward rate of return calculation every idea had a >20% for the next 4 years. Nansin and Fujimak really stand out over all with returns of >35% over that timeframe when the market recognizes it finally and the businesses prosper like in the past. So thank you for your ideas, i have already 10% of my portfolio in your picks and would like to go up to 20% in the next months.

[west]

I visited Bloomberg's office in San Francisco and briefly got to use one of their terminals.  It seemed pretty neat, but I don't think it lets me do fancier things like define my own definition of ROIC and, say, normalize it over the last five years while also outputting the standard deviation of the value?

 

Yes it will, you just have to define some custom data points / functions.  The ~$2k/month cost is a bit much for most people tho.

 

Thanks for letting me know.  As a non-professional, I've also wondered if it gives access to sell-side reports?  I've always wondered where the actually-in-the-finance-world members of this board get access to those, among other things (like, say, the Moody's and S&P reports on specific company's debt).

[west]

So I scrape from MSN Money first.  And then Financial Times.

 

I figure the nice thing about going to two data sources is it double checks that they both have the same data.

 

I think i checked nearly every one of your ideas on morningstar and wsj.com and with my forward rate of return calculation every idea had a >20% for the next 4 years. Nansin and Fujimak really stand out over all with returns of >50% over that timeframe when the market recognizes it finally and the businesses prosper like in the past. So thank you for your ideas, i have already 10% of my portfolio in your picks and would like to go up to 20% in the next months.

 

Awesome!  I'm glad they're working out for you.

 

On the Morningstar and WSJ forward return calculator thing-a-na-bobs, do you have a link to them?  (I should have subscriber access to both if it's needed).  Also, do you know what their return calculation methodology is?  I'm always skeptical of black boxes...

 

(As an aside, this is why I don't like using the Magic Formula picks on magicformulainvesting.com.  I haven't been able to reverse engineer their exact methodology, so I can't determine how "stable" (not susceptible to change) the methodology is.  So, at least for now, I've staying away.)

[frommi]

I only took the data from their pages, i do the calculation by myself. For these stocks its (distance to tangible bookvalue in percent/years)+dividend yield+bookvalue growth.

The morningstar and wsj data is free, no need to pay for something. For morningstar just google "morningstar 9776" and on wsj you can get the data

here: http://quotes.wsj.com/JP/XTKS/9776/financials

[west]

I only took the data from their pages, i do the calculation by myself. For these stocks its (distance to tangible bookvalue in percent/years)+dividend yield+bookvalue growth.

The morningstar and wsj data is free, no need to pay for something. For morningstar just google "morningstar 9776" and on wsj you can get the data

here: http://quotes.wsj.com/JP/XTKS/9776/financials

 

Thanks.

[frommi]

http://in.reuters.com/finance/stocks/9776.T/key-developments/article/3108224

 

They bought back 13% of all outstanding shares in november.

[ccplz]

How about currency risk?

 

What if the yen depreciates further?

[rukawa]

How about currency risk?

 

What if the yen depreciates further?

 

You should hedge your currency exposure. If your broker allows you to trade FX you should attempt short the yen while going long the equity. I would argue that you should do this with any "QE" currency e.g. Euro. The equity and currency should move in opposite directions so if you don't hedge, your gain will be significantly smaller than if you do.

[oddballstocks]

How about currency risk?

 

What if the yen depreciates further?

 

You should hedge your currency exposure. If your broker allows you to trade FX you should attempt short the yen while going long the equity. I would argue that you should do this with any "QE" currency e.g. Euro. The equity and currency should move in opposite directions so if you don't hedge, your gain will be significantly smaller than if you do.

 

Just had a giant discussion about this in the other Japan thread.  Some say hedge, others say hedging increases risks and takes on oversized positions.  Do you really want to go 100% home currency?  If you own Coke do you try to hedge out the international stuff?  What is the Dollar isn't really the best? 

[rukawa]

Just had a giant discussion about this in the other Japan thread.  Some say hedge, others say hedging increases risks and takes on oversized positions.  Do you really want to go 100% home currency?  If you own Coke do you try to hedge out the international stuff?  What is the Dollar isn't really the best?

 

It depends.

 

I am Canadian. I never hedged my Russian (2014) or my US (2010) investments because in both cases I didn't have a view on the currencies. And in most cases I wouldn't hedge a "value" investment in a country because I am usually looking at the country in the first place because its unfavored which should be reflected in the currency and in the companies.

 

However, in Japan my decisions are strongly based on the Kyle Bass thread. My view is that Japanese QE will have strongly negative effects on the Yen. Japanese institutional investors are already dumping Japanese bonds and increasing their stock exposure both foreign and domestic.

http://www.bloomberg.com/news/2014-11-04/japan-pension-s-new-strategy-means-adding-187-billion-to-stocks.html.

As Japanese institutional investor dump bonds paying zero percent and buy foreign and domestic stocks it has two effects: it depreciates the Yen and appreciates equities. Plus I think there will be a strong Japan/US carry trade, take a loan in Yen at rates close to zero, convert to USD and invest in an appreciating US equity market. My view is that Japanese QE will have strongly negative effects on the Yen.

 

In effect what Japan is basically doing is monetizing their debt by printing money. The intent is to produce inflation which means every year if the BOJ gets its way the Yen will be worth less.

 

The real question is why didn't the US QE produce a strong depreciation of the US dollar vs other currencies. And my answer is that it would have except for two things:

1) there was no where else for anyone to put their money than the US at the time. Europe wasn't rapidly growing. US was bad but everywhere else was too.

2) China and many other countries peg their currency. So when the US prints money it has no effect on the price of Chinese goods or the exchange rate. They remain exactly the same. But how does the Chinese government accomplish this amazing feat. They print Renminbi and which then results in inflation within China but not in the US.

[writser]

Key question: even if you are right, why would QE not be priced in in current exchange rates?

[theasiareport]

Tweedy Browne has a really good paper on this.

 

Excerpt:

"During our own more recent experience as a global portfolio manager, over the 20½-year

period from January 1, 1994 through June 30, 2014, the MSCI World Index (Hedged to US$) had an

annualized return of 7.1%; this return was nearly the same as the return over the same period for the

unhedged MSCI World Index, which had an annualized return of 7.2%."

 

&

 

"In summary, over long measurement periods, studies have generally indicated that the

compounded annual returns on hedged foreign stock portfolios have been similar to the returns on

unhedged foreign stock portfolios.

 

Over shorter periods of time, hedged equity portfolios have been significantly less volatile than unhedged equity portfolios, and have avoided heart-stopping, multi-year 45% - 58% currency losses."

 

http://www.tweedy.com/resources/library_docs/papers/HowHedgingOct2014Fund.pdf

[rukawa]

Key question: even if you are right, why would QE not be priced in in current exchange rates?

 

Many reasons.

 

1) Exchange rates are based on demand and supply. The effect of these changes will occur in the future not today. The GPIF has not yet started buying foreign equities

2) There is no certainty the the BOJ will actually do what they are saying they will do

3) Massive bets against the JPY would involve taking huge short positions on the currency or large forward contracts. I don't see any institutional investor (banks, pensions etc) having the stomach for it with the possible exception of Kyle Bass.

 

Anyways if you hedge you lose nothing. Worst case is that the currency appreciates. By not hedging you are implicitly taking a position on the currency. I mostly agree with the concept of not hedging. But in cases where you feel currency depreciation is likely why not do it. Its not like its that difficult.

 

To be honest I don't really think I completely understand what I am talking about. And here I am driven more by gut instinct than any real understanding. My instinct is that the Japanese will depreciate their currency. Most of the rest is just hand waving.

[frommi]

Perhaps i am just dumb, but from my point of view when you buy a japanese stock (like the ones we are discussing, ie mainly yen based assets+revenue) you are making an implicit bet that the currency is stable or moves in your favor over the holding period. When you hedge the currency, you can just ignore the currency and focus purely on the valuation.

What do you do when the price of your stock has moved to the value and its time to sell, but because of the currency you are still sitting on a loss?

 

The last 20 years are a pretty short period of time when you speak about currencies, especially as an us based investor. When currencies fail they fail pretty fast and that would not be the first time in history that it happens. The hedge is just an insurance, and especially in the case of the yen your premium is low and the risk of loss is very real.

 

When someone is saying he burns down your house (BoJ in this case), i am pretty sure you don`t forget about your fire insurance.

 

@writser How can the market price something into the currency thats an ongoing effect and has no defined endpoint? They can`t even stop the printing press anymore and paper has no real intrinsic value. Look at Weimar, argentina or russia.