Osaka Organic Chemical Industry is a Japanese company founded in 1941, which mainly engages in the manufacture and sale of esterified products, organic synthesis products and chemical products. Its manufacturing and sales include acrylic acid esters, acrylic acids for paint, adhesives, inks, electronic materials (displays/semiconductors), organic chemicals and materials for cosmetics and pharmaceutical intermediates. This small company has 400 employees.
Valorization
Osaka Organic Chemical is trading at an attractive price of 16.5 times recurring earnings, 1.2 times tangible book value, 1.35 times sales and 14.8 times free cash flow. From a dividend perspective, it is a little less good, with a yield of 1.78%, but this is explained by a conservative payout ratio of 29.5% to earnings and 26.4% to free cash flow. OOC therefore has a good margin of safety to continue to grow its distributions in the future. It has not held back from doing so so far, having increased its dividend at a steady pace over the last five years, with an average annual growth of 23.7%.
Balance sheet & result
Just like the dividend, profits, cash reserves and asset values are growing over the long term, which proves the solidity of the Japanese company's business model. OOC clearly manages to create value for its shareholders over the long term and this is reflected in the share price which has almost tripled over the last three years.
The cash reserves are very comfortable. They are almost too high! The general liquidity ratio is indeed increasing, at 2.97 and the reduced liquidity ratio stands at 2.2. The Japanese company can therefore see the bills coming with great serenity! However, the reserves should not continue to increase too much in this way because that would clearly become a waste of resources.
The gross margin is up very slightly, at 27%, for a correct free cash flow margin of 9.1%. A very small black spot to note, the return on assets, which is down slightly, at 5.48%, for a profitability in cash flow of assets which still amounts to 9%.
The long-term debt-to-asset ratio is down to 3.4%. Debt is also not really a concern for OOC, since it could be paid off in less than a year using all free cash flow.
Another positive point is the number of shares in circulation, which is stable, or even slightly decreasing over the long term, which is good news for shareholders.
Conclusion
Osaka Organic Chemical Industry is a very solid company, with little debt, large cash reserves and good profitability. Despite the strong share price rise in recent years, its valuation remains attractive. I believe the share price should gain about 1/3 to reflect the intrinsic value of the company and the dividend should do at least as well.
I took a position on this great company at the beginning of this month. Despite the nice increase on Monday, the stock remains as interesting as ever.
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Hello Jerome,
Thank you for introducing all these great companies.
Seeing you take a position on almost every one of them, I can't help but wonder if it wouldn't be wiser to buy an ETF. Sure, it would take away the fun of stock picking, but isn't a balanced portfolio supposed to contain about 25 stocks? How do you manage to follow so many stocks? I'm amazed.
Good morning,
The best diversification is obtained at 50 positions. Beyond that, it brings nothing more. I admit that I have currently exceeded this quota. However, I prefer to err on the side of excess diversification than the opposite.
An ETF would be useless. They do not have my criteria of appreciation and the values that I currently select are too 'outside the box'.
I can follow them because I'm only interested in long term fundamentals. I don't care about the news to be honest.
I espouse the same "anti-ETF" philosophy as Jérôme and I would add that I also do not believe that there is an ideal number of positions in a portfolio. If I like 50 companies, I aspire to have them all one day, if I like 100 it will be 100, etc.
Let's take an extreme example for illustration purposes: Investor X only buys S&P500 stocks. If he likes 400 of these companies and hates the other 100, investing in these 400 companies rather than buying an S&P500 ETF is in my opinion the best thing for him to do (provided of course that the brokerage fees are reasonable), because this is the approach he agrees with and will be able to follow even in tough times.
Just Auguste as an investor brother would say.
As already written several times on this subject, ETFs artificially inflate many stocks, just because they are in the ETF, not for their intrinsic quality.
When you blend noble wines you get good blends, when you cut them with cheap wine you get cheap.
ETFs over-represent entire sectors of finance and engage in risky securities lending games. They could one day be the next subprimes….
That being said I do use some to diversify with minority positions like gold, bonds, real estate and emerging markets.
I just closed the position according to my stop loss procedure 20%