Analysis of Bridgestone Corp (5108:TYO)

I introduced you a little less than a year ago the analysis of the Japanese tire manufacturer Bridgestone, which is also listed on the German market (BGT:MUN). Let's see how the situation of this tire giant has evolved, following the publication of the 2018 figures.

Valuation & dividends

Unlike last year, all the lights are no longer green, due to a big drop in free cash flow. On the other hand, the other valuation indicators have improved since 2018. The price thus amounts to:

• 11.34 times current recurring earnings
• 11.56 times average recurring earnings
• 1.39 times book value
• 1.45 times tangible assets
• 0.91 times sales
• 33.86 times current free cash flow
• 16.78 times the average free cash flow

Despite this small shadow on the picture due to the drop in FCF, the price of the Japanese giant remains overall quite interesting, which is confirmed by an EBIT / EV ratio of 13.76% and an EBITDA / EV ratio of 14.88%.

The dividend is not left out, since the yield amounts to a very decent 3,64%, for an average annual growth rate of nearly 10% over the last five years. Note that Bridgestone increased its distributions for nine consecutive years between 2009 and 2018. However, it plans to keep them unchanged in 2019, which is certainly linked to the notable drop in FCF. Indeed, the dividend amounts to:

• 41.26% current recurring profits
• 42.06% average recurring profits
• 123.21% of current free cash flow
• 61.04% of average free cash flow

The Japanese tire manufacturer has therefore chosen to play it safe given this particularity for the 2018 financial year. We will not hold it against it, especially since the other indicators tend to point towards a small temporary hiccup that does not seem a priori to call into question the future payment, or even the growth, of the dividend. This is an element that will nevertheless have to be monitored in the future.

Balance sheet & result

Just like the dividend, earnings per share and cash reserves are increasing over the long term. It is a little more difficult, however, on the asset value side, which is stable, or even slightly decreasing. This may explain why the price has struggled to take off over the past five years. On the other hand, the latter has more than doubled over the past ten years.

From a liquidity perspective, it is very solid, since the current ratio stands at 2.21 (up) and the quick ratio at 1.52. The Japanese giant's suppliers have nothing to worry about: their invoices will be paid without any problem.

Although down very slightly, the gross margin remains respectable, with 37.8%. The net margin is also quite correct, with 8%. On the other hand, once again, there is a small problem in the 2018 financial year since the free cash flow margin only amounts to 2.68%.

Profitability is quite pleasing to see, with an ROA up to 7,55%, an ROE of 12,24% and a CFROA of 9,34%.

This is just as good, if not better, from a debt perspective. The long-term debt-to-asset ratio stands at 5.57% (down). The company would be able to pay off its entire debt in just two years using its average free cash flow. Of course, taking into account the FCF for the 2018 financial year would be a bit more laborious. That being said, total debt has been on a downward trend for several years and currently represents only 0.17 times equity.

The number of shares outstanding is also stable in the short term and even bearish in the long term. This is a positive point for the investor who sees his share of the pie increase over time.

Conclusion

Bridgestone is still a very solid company, with low debt and very good cash reserves. The Z-Score (Altman), with 3.8, and the F-Score (Piotroski), with 8, confirm the sustainability of this great company. Stocks with such high F-Scores are rare and often tend to outperform in the future.

Let us also note the defensive nature of the title, with a beta of 0.76. This does not, however, prevent it from being quite volatile (19.67%).

Since my purchase last year, BGT has shown a total return that is just positive in my currency, including dividends. Paradoxically, the stock is slightly less attractive from a valuation point of view, particularly because of the deterioration in FCF. Last year I saw it as slightly undervalued, this year I see it as very slightly overvalued.

For this reason, but also because the Japanese market is in a phase of decline, I no longer consider Bridgestone as a buying opportunity. On the other hand, it is obviously a stock to hold.