Analysis of Tensho Electric Industries Co Ltd (6776:TYO)

Let's just say that for some time now, I've gotten into the habit of writing analyses of Japanese stocks. I have no particular attraction to this country, but it simply turns out that it's one of the last places on the planet where you can find quality stocks at bargain prices. However, what I'm not used to is talking about stocks that don't pay dividends. After all, that's the central theme of the entire site!

Until now, I have indeed always invested in stocks that pay dividends, especially when they are growing. The only real exception to this sacrosanct principle was my purchase of BRK-B (Berkshire Hathaway), the company of our dear Warren BuffettIn this case, since the profits are reinvested in a more than intelligent and judicious manner, we are willing to turn a blind eye to the fact that BRK does not pay distributions.

Most savvy investors prefer to receive dividends because it's a well-known fact that companies often don't use their cash optimally. As the saying goes, "A bird in the hand is worth two in the bush." But every now and then, you come across some gems that seem to know what they're doing with their money, as is the case with BRK or Tensho Electric Industries. After all, profits reinvested in a quality company are nothing more than dividends that can be deferred (and/or valued as capital gains).

Tensho Electric Industries Co., Ltd. is a Japanese company that has been active since 1940. The company manufactures and sells parts for household appliances, automotive components, industrial materials, and molds. It is also active inreal estate (rental of buildings and land). It is established in Japan and China and has 459 employees.

Tensho's stock is attractively priced at 7 times recurring earnings, 1.36 times tangible book value, 0.44 times sales, and 7.15 times free cash flow. Although the company doesn't pay a dividend, it has a strong track record of creating long-term shareholder value. Its earnings are growing over time, as are its asset values and cash reserves. This is clearly reflected in the share price, which has more than quintupled in the past five years.

Cash reserves are certainly not enormous, but still sufficient to meet the company's current obligations. The current ratio thus stands at 1.2 (still up compared to the previous year) and the reduced liquidity ratio at 1.07. gross margin is also up, 22.4% (for a net margin of 7.58%). Also up, the return on assets, which amounts to 6.38%, for an appreciable return on equity, at 27.32%. Comparison is not reason, especially in this area, but for the sake of form we will still note that BRK has a net margin of 7.9% and a return on equity of 6.47%. There is therefore undeniably a growth aspect in this value stock, which also explains why the price/book value ratio is (a little) higher than that of the other companies that I have been able to present so far.

The debt ratio is quite high (relative to assets), at 23,28%, but it has still decreased significantly (the ratio was 27,11% the previous year). If we analyze the free cash flow / total debt ratio, we realize that the Japanese company can theoretically repay all of its debt within five years using all of its available free cash flow. Moreover, long-term debt and total debt have decreased every year since 2013. It is also worth noting that the number of shares outstanding is almost stable (small increase in 2015).

Despite Tensho's spectacular share price rise over the past five years, the stock is still trading today at less than a third of what it was worth in 1990! I believe the price could easily double in the next few years. And who knows, maybe in the not-too-distant future, it will also pay a dividend...

I've just taken a position on this stock.