Nakano is a Japanese company that makes refrigerators for supermarket and convenience stores. Nakano is a high-quality business, it’s undervalued, and the stock has a catalyst.
Business Quality:
In the last 10 years, Nakano’s lowest ROIC was 14.5%. Now that their cash conversion cycle has gone negative and operating income has risen above net fixed assets, Nakano’s ROIC is more than 150%. Recent business performance has been particularly strong. In the last two quarters, ROA, ROE and Gross Profits to Total Assets have averaged above 10%, 18% and 29% respectively. These are great numbers, and this is without adjusting for the company’s excess capital. Finally, over the last ten years, SG&A and outstanding shares are down, and tangible book value per share has compounded at greater than 10%.
Cheap:
EV/EBIT is less than 2, and capex has been only two-thirds of depreciation over the last 10 years. Also, P/B is 0.85% and P/E is 5.
Valuation:
Nakano could return up to 85% of its market cap in excess cash without hurting its core business. Using [6*average EBIT + excess cash - long-term liabilities] to conservatively estimate value, the stock has 75% upside.
Catalyst:
Nakano’s sales are set to increase dramatically as they help Seven&I (3382.JP) roll out more 7-11 stores etc in Japan. Bloomberg estimates that Nakano’s operating income will be more than double yoy and continue to be elevated for at least the next few years. The effects of Seven&I's growth can already be seen in Nakano’s last two quarters. Sales are up over 50%, gross margins have gone from the high-teens to the mid-twenties and operating income is up 2.5x. When the market notices the dramatic growth in earnings, there is a good chance the stock will reprice higher. Using these new estimates, Nakano’s stock could be a 3x.
