Interesting take on KYO:
Monday March 13, 2:51 pm Eastern Time
worldlyinvestor.com Region of the Day
ADR of the Week: Get Kyocera While It's Not Hot
By William L. Valentine, Columnist
Shares of Japanese electronics firm Kyocera have cooled nicely from their overheated condition.
Sometimes you have to let a stock cool before you can handle it. Such is the case with Japanese electronics giant Kyocera (NYSE:KYO - news).
Last year, the diversified electronics company was white hot, rising 137% in December alone. Despite my interest in increasing exposure to Japan, and my affinity for Kyocera, I didn't think the stock would cool off in time for me to buy it this year.
But now it has, and the company's rapidly improving fundamentals have earned it a spot on my roster. At current levels, Kyocera's stock is very reasonably priced relative to peers. Having cooled from its peak at $280 last year to around $168 today, the stock looks great next to prospective earnings growth.
A Ceramics Start
Kyocera was formed in Japan in 1959 as a maker of fine ceramics. In the early 1970s, the company began to modify its manufacturing toward the production of integrated circuits (IC) and other electronic parts that rely on the low conductivity of heat and electricity that ceramics posses. Kyocera grew to be the world's largest manufacturer of IC ceramic packages. And as it grew, it diversified.
Today, its varied interests include everything from cameras and printers to cell phones and ceramic prosthetics. In a sense, it considers its competitors to be everyone from Canon (Nasdaq:CANNY - news) and Xerox (NYSE:XRX - news), to Nokia (NYSE:NOK - news) and Sony (NYSE:SNE - news).
The largest division of the company is ceramics and related components. This includes the IC packages, electronic components, fine ceramics, and consumer products. About two-thirds of sales come from this division. This segment is growing nicely and is benefiting from the sector-wide uptrend in semiconductor manufacturing.
A Division with the Most Potential
The second-largest division, its electronic equipment group, is comprised of telecommunications equipment and printers. While currently making up about 28% of sales, this is the area with the greatest potential.
Kyocera recently purchased Qualcomm's (Nasdaq:QCOM - news) cellular handset manufacturing division and is combining that company's facilities with its own in order to make a run at dominating CDMA-standard phone sales.
It will have 15% market share out of the gate, and as the CDMA standard spreads, it will benefit tremendously. In the interim, it needs to make Qualcomm's division profitable. Also, it will slow production of phones while transferring its phone chipset facility to the Qualcomm side.
The electronic-equipment division also includes communication equipment parts. The insatiable demand for wireless equipment bodes well for Kyocera's components. Kyocera has leading market share, great margins and rapid growth in many of these products.
On top of its own production, Kyocera owns a major stake in DDI, the upstart telecommunication firm in Japan. While that investment has done well for Kyocera, its stake in the now-bankrupt Iridium satellite cellular phone venture will be fully written off this year.
Expansion into Printers
Finally, printers are included in the electronic equipment division. Kyocera recently expanded its commitment to this industry by way of its purchase of Mita Kogya, the makers of industrial printers under the Mita name that it will combine with the Kyocera line.
The third division, optical equipment, is made up of Yashica and Contax brand cameras. Historically, this division has not been a source of particular strength to the company and it currently only contributes about 5% of the revenue.
The final division is finance and other, which accounts for 2% of sales -- in a good year. This area will drag on profitability this year by virtue of asset-depreciation related losses in Kyocera's leasing operations. There will, however, be partial offsets from gains on the sale of certain securities.
Other Reasons to Love It
This is a uniquely diversified technology company. The hot semiconductor market is fueling growth on one end and the wireless business is powering the other. The investment in Qualcomm's handset business, coupled with its leading market share in communication equipment, ensures that it will participate in the outstanding prospects for wireless telecommunication.
Secondly, my belief is that the improving economic condition in Japan will continue. That will continue to draw investors and bodes well for the Nikkei. Well run, profitable Japanese companies will draw much of the interest.
Finally, the forward price/earnings of 48 -- using my estimate of $3.50 EPS for next-year -- creates a PEG (P/E to Growth) of 1.2, over long-term earnings growth of 40%. Up next to the PEGs of a Cisco (Nasdaq:CSCO - news) at 4, Oracle (Nasdaq:ORCL - news) at 5, or even Philips (NYSE:PHG - news) at 3, it looks downright cheap.
I've got this stock in my on-deck circle and I'd invite anyone seeking a reasonably priced tech stock to give Kyocera a tryout.
William L. Valentine, CFA, is president of www.ValentineVentures.com, an investment manager of global stocks for individual investors. His weekly column, ``ADR of the Week,' focuses on one foreign stock that trades in the US as an American Depositary Receipt (ADR).
Go to www.worldlyinvestor.com to see all of our latest stories. |
