Japan is one of the largest and most developed economies in the world. And its flagship Nikkei index has 225 different companies. There is no shortage of quality companies in Japan. In other words, there’s more to choose from What just nintendo (OTCPK:NTDOY) Where sony (SONY) if you want to invest in Japan.
And now is the perfect time to visit Japan. The Nikkei has been limited in recent years. Then in 2022, the value of the Japanese yen fell against the US dollar. Consequently, the iShares MSCI Japan ETF (EWJ) had fallen to a nearly five-year low before last week’s rally:
While the Japan ETF is a good way to gain exposure to Japan, it’s also an interesting time to kick in individual businesses. I looked at many companies in the Nikkei index and selected a few for my portfolio. I had already bought a cosmetics company Shiseido (OTCPK:SSDOY) and now I’m adding a second name to my Japanese holdings.
Most of you probably haven’t heard of Murata manufacturing (OTCPK: MRAAY) (Tokyo-6981). If so, however, chances are it’s because of the Murata Boy robot pictured above.
The Murata Boy debuted in 2005 and is a robot capable of riding a bicycle. It included the following features:
- gyro sensors (for stability and recovery)
- a shock sensor (for impact detection)
- an angular velocity sensor
- a temperature monitor
- a CCD camera
- an ultrasonic sensor (for obstacle detection)
- an infrared sensor (to detect human movements)
- an EMI filter (to reduce electronic interference)
- Low energy Wi-Fi and Bluetooth modules (for interaction)
These additional features were also manufactured with Murata electronics to highlight the company’s range of capabilities.
In 2008, the company released the Murata Girl robot, which has a similar function, except this time it was riding a unicycle. Both were capable of features such as climbing hills and riding tightropes, showing the functionality of the various electronic sensors, filters, etc. by Murata.
Robot bikes are unlikely to ever represent a significant business opportunity. However, it is a good entry point to understand what Murata, the company, is.
Murata was founded in 1944 by inventor and engineer Akira Murata as part of his personal business. Akira would go on to lead the company as CEO, incredibly enough, until 1991. Another member of the Murata family continues to serve as CEO to this day.
Murata conducts an incredibly wide range of operations including, but not limited to:
- Multilayer ceramic capacitors
- Power supplies
- Bluetooth modules
- Piezoelectric sensors
- Ceramic filters
- SAW filters
Among these, “MLCC” multilayer ceramic capacitors are the most important business segment. MLCCs are used in countless electronic applications. In fact, the world uses more than 2.5 trillion MLCCs each year. Murata alone manufactures more than 100 billion per month.
The main markets for these are smartphones, computers, audio-visual applications, household appliances and automobiles. Smartphones have been a highly competitive industry, with major players such as Apple (AAPL) significantly reducing margins due to its massive scale.
Moreover, the amount of electronic equipment needed in a smartphone is relatively small. Although the number of phones sold worldwide has been huge, it hasn’t actually resulted in such huge sales growth for the four MLCC leaders (of which Murata is by far the No. 1).
At this point, a Credit Suisse report found that automobiles consume 10 times more MLCC hardware (based on an average selling price) than smartphones. And the number of MLCCs entering cars continues to grow at a rapid rate as more and more cars go digital. Electric cars require a lot of electronic hardware that internal combustion engines don’t have. Similar needs arise for having a car that is always connected to the internet, or can drive autonomously and needs a wide range of sensors, monitors and other equipment to drive itself safely.
The pandemic has shown this reliance on electronic equipment in automobiles. The automotive industry has indeed been one of the hardest hit by various supply chain shortages as producers could not obtain enough electronic equipment and semiconductor chips to put in their cars and their trucks.
Long story short, industry estimates suggest there will be over 5 trillion MLCCs needed every year for the next few years, again doubling the size of the industry from what it is today. today. And Murata holds more than 50% market share in the high-end part of the MLCC market. That’s before we get into anything else the company does in other electronics.
The rest of the bull case is simple and short. Murata has a competitive edge as it is the biggest player in its niche and has an advantage in both cost and R&D over its peers.
Meanwhile, the stock is incredibly cheap after this year’s sales blitz in all areas of technology, as well as the drop in Japanese assets in particular:
That’s right, we’re at 13.5x earnings and 7x EV/EBITDA for a company that grew earnings at a double-digit compound rate and achieves respectable profit margins. Free Cash Flow is down this year, but Murata is now also around 11x normalized EV/FCF.
I know that anything related to the tech industry, smartphones, and automobiles is out of fashion right now, but the valuation is pretty compelling for a big, mission-critical tech player. You simply cannot make much of modern electronics without MLCCs and other Murata products.
As financial statistics can be more difficult to find for Japanese companies, I have reproduced its 10-year results (in dollars) below:
As you can see, the company has had considerable success. Revenues have more than doubled over the past decade. During this time, gross margin fell from 30% to 42% as the company focused on producing higher value components while exiting some raw material businesses.
Another selling point of Murata is its impeccable track record. The company has almost no outstanding debt and indeed holds net cash of approximately $3 billion. This gives Murata ample room to make acquisitions, repurchase inventory, build new manufacturing capabilities, or do whatever management deems necessary to grow and optimize the business.
The company isn’t primarily an income game, but it has doubled its dividend over the past decade and shares are yielding almost 2% thanks to the recent decline in share price.
Remember that since it operates in Japan, Murata benefits from a weaker yen. Indeed, management has forecast that earnings will rise despite input prices and inflationary pressures, mainly because the yen has fallen so far. For those of us buying in dollars, stocks are more than 20% cheaper thanks to the sharp and sudden drop in the yen since the start of 2021.
The world needs more electronic components to power all kinds of things, especially more advanced car models. Murata is exceptionally good at this role and has a massive market share in the high margin portion of its niche. The company has experienced solid growth in revenue and tremendous growth in earnings and cash flow. It shouldn’t trade at 13x earnings for too long.
Meanwhile, with the double factor of tech industry worries and the falling yen, MRAAY (in dollars) stock is back to where it was trading about five years ago. As you can see, the stock has been a consistent winner, rising from $4 as it emerged from the 2008 financial crisis to a high of $25 last year. Now, with nearly half of the stock, it’s a great time to pick up that e-game again with a long-term tailwind of electric cars at a discount.