– By GF value
The stock of Japan Tobacco (OTCPK: JAPAY, 30-year financial data) gives all indications of a fair valuation, according to the calculation of GuruFocus Value. GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock should trade. It is calculated based on the historical multiples at which the stock has traded, past growth in business and analysts’ estimates of the company’s future performance. If a stock’s price is significantly above the GF value line, it is overvalued and its future performance is likely to be poor. On the other hand, if it is significantly lower than the GF value line, its future return will probably be higher. At its current price of $ 9.6899 per share and market cap of $ 34.4 billion, Japan Tobacco stock is estimated to be fair value. The GF value of Japanese tobacco is shown in the graph below.
With the valuation of Japan Tobacco being fair, the long-term return on its share should be close to the rate of growth of its activity.
Investing in companies with low financial strength carries a higher risk of permanent loss of capital. It is therefore important to carefully consider the financial strength of a company before deciding whether or not to buy its shares. Examining the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a business. Japan Tobacco has a cash-to-debt ratio of 0.45, which is within the average range of companies in the tobacco products industry. GuruFocus ranks the overall financial strength of Japan Tobacco as 5 out of 10, which indicates that the financial strength of Japan Tobacco is acceptable. Here is Japan Tobacco’s debt and cash flow over the past few years:
It is less risky to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A business with high profit margins is also generally a safer investment than a business with low profit margins. Japan Tobacco has been profitable 10 in the past 10 years. In the past twelve months, the company achieved sales of $ 19.9 billion and earnings of $ 0.89 per share. Its operating margin is 23.40%, which ranks in the mid-range of companies in the tobacco industry. Overall, GuruFocus ranks Japan Tobacco’s profitability at 7 out of 10, which indicates fair profitability. Here is Japan Tobacco’s turnover and net income for the past few years:
Growth is probably the most important factor in the valuation of a business. GuruFocus research has shown that growth is closely tied to the long-term performance of a company’s stocks. The faster a company grows, the more likely it is to create shareholder value, especially if the growth is profitable. The average annual growth rate of income over 3 years of Japan Tobacco is -0.4%, which ranks in the mid-range of companies in the tobacco products industry. The 3-year average EBITDA growth rate is -2.1%, which ranks in the mid-range of companies in the tobacco industry.
One can also assess a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures the extent to which a business generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all of its security holders to fund its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely to create value for its shareholders. In the past 12 months, Japan Tobacco’s ROIC is 8.20 while its WACC is 3.66. The historical comparison of ROIC to Japan Tobacco’s WACC is shown below:
In conclusion, Japan Tobacco (OTCPK: JAPAY, 30 years of financial stocks) seems to have a fair value. The company’s financial position is fair and its profitability is fair. Its growth is in the mid-range of companies in the tobacco products industry. To learn more about Japan Tobacco’s stock, you can view its 30-year financial statements here.
To find out about high-quality companies that can deliver above-average returns, please see GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.