Subaru Corp (7270:TYO) Analysis

SUBARU CORPORATION is a Japanese automobile manufacturer active since 1953. The company is mainly involved in the automotive, aerospace and industrial products sectors. The stock is also traded on the Frankfurt Stock Exchange (FUH).

Valorization

Subaru is trading at an attractive price right now, like many stocks in the automotive industry. The price is 12.5 times recurring earnings. The ratio is even 9.8 if we take the average earnings of the last five years, which vary quite significantly from one year to the next, which is explained by the cyclical nature of Subaru's business. Compared to tangible assets, the price is quite correct, with a ratio of 1.8. From a sales perspective, the valuation is attractive, with a ratio of only 0.8. As for free cash flow, the company is also trading at an attractive price, with a ratio of 12.6, and even 10.44 if we take the average of the last five years.

From a dividend perspective, the stock is very generous, with a yield of almost 4%. The average annual growth rate has been impressive over the last five years, at 24,57%, but this is thanks to the strong growth in 2014-2016, as the dividend has remained static since then, due to the concomitant decline in earnings. Despite this, the payout ratio still remains at fairly decent levels, at 50% (relative to earnings and FCF).

Balance sheet & result

Just like the dividend, the value of assets, cash reserves and earnings are growing over the long term, which proves the strength of Subaru's business model. The Japanese company is clearly managing to create value for its shareholders, and this is reflected in the share price, which has increased sevenfold over the last ten years.

Cash reserves are comfortable, with a current ratio of 1.8 (down very slightly) and a liquidity ratio of 1.5. The company therefore has no problem meeting its current financial obligations.

The gross margin is quite good, and slightly up, at 28.3%, for a correct free cash flow margin of 6.45%. Profitability on the other hand is down, at 7.64% in relation to assets. This nevertheless remains at correct levels, which is confirmed by an ROE of 14.2% and a profitability in cash flow of assets of 12.8%.

Debt has been steadily declining for years, to the point where it has become insignificant. Long-term debt thus represents 0.73% of assets. The entire debt, which represents only 0.06 times equity, could be repaid within 4 months using FCF.

The number of shares outstanding has been stable since 2017 and even decreased between 2016 and 2017.

Conclusion

Subaru is a nice company, with a fairly long history, decent gross margins, relatively low overheads, very little debt and fairly modest capital expenditures, despite the industry.

Of course, due to the nature of Subaru's operations, this is not the kind of stock that you can hold on to with your eyes closed. The beta of 1.3 is there to remind us of that. Nevertheless, the volatility, at 15.9%, remains at levels that are still manageable for those with a weak heart. At the same time, it would be surprising if it were otherwise since nothing much has been happening with Toyota's share price for many months.

I bought this stock on July 26, 2017 and the price has barely moved since then. I believe that Subaru is currently trading at a price that fairly reflects its intrinsic value, with perhaps a very slight undervaluation. It is therefore a stock to hold in your portfolio, or to watch for a possible purchase.