TOMOKU is a supplier of corrugated cardboard packaging and other forms of packaging required by logistics and distribution companies. TOMOKU also sells imported home construction materials from its subsidiary in Japan. SwedishThe company also designs, builds and sells individual houses. It has been active since 1940.
The stock is very significantly undervalued, with a price-to-earnings ratio of just 6.8 and a price-to-book ratio of 0.6. The price-to-sales ratio stands at a very modest 0.21.
The dividend yield is not extraordinary, at only 1.82%, but this is explained by a very low payout ratio of only 11.8%.
The company is able to grow not only its profits over the long term, but also its dividends, the value of its assets and its cash reserves. This proves that it is able to create shareholder value over the long term.
The current ratio, with 1.5, and the liquidity ratio, with 1.2, demonstrate that the company has enough reserves to meet its current obligations. These reserves are ideal in the sense that they are sufficient, but not excessive, which would demonstrate poor use of liquidity.
Cash flow is positive, gross margin is up, return on assets is also positive and up, while debt ratio and number of shares outstanding are down. What could be better?
The company has a great history. It operates in a sector that is not very sexy, but which does not care much about what is happening around it. We will always need packaging and housing...
I believe the stock can easily double in the next few years, and the dividend will do at least as well. For now it is just beginning to recover from the bursting of the Japanese bubble in the '90s.
So I just took a position on this title.
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Picasso had his blue period, Van Gogh his Dutch period. In a century we might still be talking about Jerome's Japanese period 🙂
Eh eh eh…
It's like sailing. When the wind is no longer good on one side, you change sails, while continuing to sail with the same boat, and the same sailor!
I would rather say that you have completely changed lakes, going from Lake Geneva to the Sea of Japan!
Most of the companies you selected have not huge profit margins and returns on equity. After all it is true that they are cheap, I hope for you that you will obtain the expected return / risk profile.
Margins and ROE at a given moment are not the most important to me. The wheel turns, yesterday's winners are tomorrow's losers and figures that are too good in these two criteria attract competition like dung attracts flies. Not to mention that many investors swear by it, which means that we pay a high price. Sometimes it's worth it because the stock is really good quality and protected from competition by a high barrier to entry (Buffett's franchises). But this is not always the case.
I don't have Buffett's intelligence or flair to easily spot those companies that manage to maintain exceptional margins and returns on equity for decades. So I take a more Graham or Dreman approach.
On the other hand, if the market collapses, then I will shamelessly help myself to the 'buffet' of 'Buffett's' values!
Yes and no… High margins and ROEs don’t necessarily stay that way over time, you’re right. On the other hand, they generally offer additional protection in tough times.
Let me explain: a company that has been operating for many years with a net margin of 15% and a return on equity of 25% is typically a high-quality company that has proven itself, successfully weathered crises and resisted attacks from many competitors. My observations have taught me that it is very rare for such a company to see its NPM and ROE drop to, say, 5 and 10% in a few years. A bad patch will typically bring these values to something like 10 and 20%, which is in itself nothing dramatic (or at least does not call into question its survival – there are of course exceptions to Kodak).
On the other hand, an average quality company with, for example, a net profit margin of 4% and an ROE of 8% runs the risk of seeing these values fall to 0-1 and 4-5% in times of crisis, or even of becoming loss-making. The risk of bankruptcy (and therefore of total loss for the shareholder) is much greater in this scenario than in the first situation.
So it's true, yesterday's losers can become tomorrow's winners. But spotting today's ugly duckling that will become a white swan is more speculation than investment for me.
Now if, as in your case, this approach is carried out with great seriousness and research and especially if the action is poorly valued at the time of purchase ("cigar butts"), we can once again speak of investment (in value) and not of speculation.
Well, as you have already pointed out, you are more Graham-Buffett and I am Munger. And it is difficult to change at our advanced ages: after all, we are already almost retired!!!
Sayonara!
What you say is right. You take your safety margin on the margin (if I dare say…) and the ROE. In my approach I do not look at the margin and profitability as such, but rather its recent evolution. I add to that a first safety margin, with the cash reserves, to avoid the risk of bankruptcy that you are talking about and a second, the price.
But once again, let's be clear: I'm not spitting on cash cow companies that make margins explode, quite the contrary. If I find some at a good price, I don't hesitate. But currently there are not many of them.
In this genre, you might prefer Norway Royal Salmon (NRS), which I also have in my portfolio…?
NRS has great fundamentals but far too much volatility for my taste. The financial results as well as the dividend go in all directions from one year to the next… And I don’t like companies that depend on a single product: If radioactivity is discovered in their salmon or a new parasite comes and kills all their fish, pfuuuuuit, no more profits and no more dividends.
I am a fan of companies like Geberit, Schindler, Belimo, APG, Partners, EMS,… but am no longer a buyer at current valuations.
It is clear that it is not a McDonald's that manages to generate cash consistently every minute that passes. That being said, this is also what explains its cheap price. It is a risk premium. The results vary from one year to the next, but the company does well as the time horizon becomes longer.
And the advantage of salmon is that after eating it you feel like you've done something bad...
On this one you were right, given the disappointing results of NRS and the drop in the dividend, I am selling the stock, with still a small gain of 33% in 9 months 🙂
Congratulations dear friend for this beautiful catch… of salmon… 🙂
Another little personal anecdote on this subject:
Hyper profitable companies always seem too expensive and you often have to force yourself to buy them. For example, I have been following LEM closely for over 10 years and I have always admired its profitability and its indecent margins.
In 2009 I bought shares at around 250 but sold them 1 or 2 years later at around 380, horrified by their valuation. At 500, I couldn't bring myself to buy them back. Same at 600, 700 and 800, even if in the meantime the fundamentals had only improved.
Finally, at the end of 2016 I got back on the train at around 900 fr. LEM then rose so quickly to 1200 that I sold again as I found the valuation so insolent.
Today LEM is close to 1400 and I continue to watch them rise, with a look as intelligent as that of a cow watching trains go by. Sometimes I tell myself that I still haven't learned anything about the stock market and that I continue to repeat the same mistakes. Every year for the past 15 years I hear an expert say that LEM is much too expensive and that you would have to be crazy to buy it... and I let myself be influenced by such opinions!
I hope one day I will have the wisdom to trust my analyses completely and act according to what I think rather than what I hear. I hope one day I will no longer be a cow. On that day, LEM will be worth 5000 fr. and I will be a shareholder again…
I have also often made the same mistake. And probably my recent sale of some US stocks can be related to it. It is true that quality companies, even (a little) expensive, can still be lucrative in the long term.
However, there is another point to note. Companies that are very popular with investors, and therefore in principle very expensive, generate high expectations. If these expectations are exceeded, the share price will rise sharply; if the expectations are met, the share price will stagnate; and if they are not met, it will collapse, very violently.
Conversely, companies that are shunned by the public generate very little enthusiasm… Nobody cares. If expectations are not met, nothing much will happen, since no one expects great things. If expectations are met, the stock price will rise, and it will literally explode upwards if they are exceeded.
Add to this the rule that yesterday's losers are tomorrow's winners, and there is a good chance that these companies that are shunned by the general public can be acquired at a good price and that profits will exceed expectations later on.
Now, we should not put all our eggs in one basket. There are very profitable companies, a little expensive certainly, but which still allow us to make very good gains in the long term. Similarly, there are stocks that are being sold off and unfairly shunned by the market and which will rise sharply when the big investors and speculators wake up. Conversely, there are very fashionable and highly sought-after companies that are really too expensive, and which have every chance of ruining the investor. No need to go back very far in time to find some... Similarly, some stocks that are being sold off by the market are being sold off for a very good reason, and there too they have every chance of ruining the investor.
In any case, whether you are more of a Buffett or more of a Graham, that is to say, you are looking for extraordinary companies at ordinary prices or rather ordinary companies at extraordinary prices, the important thing is to do your homework intelligently, keep a cool head, and be comfortable with your strategy. And nothing prevents you from alternating or mixing the two approaches. 7 years ago I was more of a Buffett, today I am more of a Graham, because of the extreme valuations of the market. The wheel turns, and will continue to turn in the future.
I like your comparison with Macdo, you are right with your risk premium. The small companies you select certainly have less stability and visibility than the big multinationals, on the other hand (in case of success) the upward potential is much greater.
I don't get the connection between salmon and doing dirty things? Because of the pink color? Or are you into porn?
Because of the smell 😉
I see that you also have a very Peter Lynch side, you prefer small caps active in a banal and unglamorous field, which do not make headlines and which are neglected by the masses. And as you point out, the best thing is to diversify between different strategies.
If my approach is mainly oriented towards high-quality but rather expensive securities, I do not hesitate to also buy, for example, real estate shares or to bet on more "value" companies such as Mobilezone in order to vary the pleasures and diversify my portfolio. To cook a good dish, you need more than just one ingredient!
Lynch I read it 17 years ago. It was rather growth oriented, but certainly reasonably priced. It is possible that it still influences me unconsciously somewhere.
Can I ask the master's opinion on Implenia? Cheap or value trap?
Master, you are exaggerating there 😉
Interesting question, and not an obvious answer, because it is contrasting...
First of all, the price: expensive from the point of view of accounting value and profits, but cheap from the point of view of sales.
In other words: in this company, we exhaust ourselves a lot for not much in the end (the margin is very low, I'm surprised by that from you ;), but hey at least it's improving...). From a dividend (yield) point of view, it's better, 3.15%, but at the expense of a total squandering of profits... so not great.
Long-term value creation: not bad, dividend increases, assets increase, cash increases. Too bad the profit does not do the same.
Liquidity reserves: OK, there is enough to see it through, and liquidity is even increasing.
The number of shares in circulation is stable and the return on assets is increasing, that's good, on the other hand the debt ratio, although low (15.75%) is increasing.
Sector of activity: construction, real estate, which I like for its defensive nature. The company also benefits from good protection against competition, thanks to its size.
In summary: interesting, but still too expensive, despite the persistent drop in the price. This is not a good sign. I would therefore wait a little for it to continue to drop to more affordable levels and for the price to stabilize.
Thank you Jerome for your detailed answer. I must say that I am really torn with this title. It is indeed not the usual genre that I am looking for, mainly because of the low margins. On the other hand, the value aspect tickles me, it must be said that at the moment there are not many cheap titles left.
This is an "off" year for Implenia due to legal issues and exceptional charges, which explains the current PE of 23. On the other hand, the estimated PE for next year is 13, and that's where it becomes interesting from a value point of view, especially since the other figures are good (notably liquidity) and the dividend should continue to increase. I think I'm going to treat myself to a small slice towards 60.
Small update on Tomoku, after publication of the latest annual figures:
– Stock still very cheap relative to earnings, tangible assets, sales and FCF
– low yield (1.6%), with low growth (flat 2017-2018), but tiny payout (15% compared to earnings and FCF)
– decreasing and slightly weak liquidity (current ratio 1.1)
– gross margin down, at 17.5% and low FCF margin, at 2.2%
– profitability down, ROA 2.9%, ROE 6.7%, CFROA 5.9%
– long-term debt down sharply, by 13.8% compared to assets. Debt represents only 0.7 times equity.
– Number of shares outstanding stable
– Correct volatility and beta (14.2% and 0.9)
In short, compared to my assessment last fall, the fundamentals are a little less good (but still ok) and the price has gone up by 14%. So it is no longer such a strong buy signal, but still an interesting stock. So keep it.