Heard in Asia: Components Makers Are Back As a Long-Term Investment
By PETER LANDERS
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Nine months ago, the unglamorous sector of electronic components included some of Japan's hottest stocks. Companies such as Kyocera Corp., Murata Manufacturing Co. and Taiyo Yuden Co. saw their share prices surge on exuberant forecasts about demand for their tiny parts in cellphones and personal computers. Then the tech bubble burst, and so did the share prices of the component makers.
Now, these companies are back in investors' sights.
While chastened by the experience of the past nine months, during which share prices have typically fallen more than 50%, many investors and analysts like the components field for the same reasons they always have. It's an area dominated by Japanese companies, and over the long run demand is likely to rise as the world adopts digital appliances such as Internet-enabled cellphones.
"The component makers are absolutely competitive internationally, they have first-class management and they are cheap," says Hiroshi Motoki, a fund manager for Alliance Capital Management (Japan) Ltd. in Tokyo.
One thing most of these companies don't have -- and probably never will -- is fame. With the exception of Kyocera, none of them produce brand-name goods for the general public.
Murata and Taiyo Yuden, for example, specialize in ceramic capacitors -- tiny bits of ceramic material that help control the flow of electricity within a device. These parts, sometimes barely larger than a speck of dust, help such better-known brand-name manufacturers as NEC Corp. and Sony Corp. make super-slim cellphones and personal digital assistants packed with sophisticated functions.
The boom in such products has proved highly profitable for these no-name operations. Four Japanese companies control 90% of the market for ceramic capacitors. Murata expects its group profit to exceed 100 billion yen ($818.2 million) in the fiscal year that ends March 31 -- a jump of around 80%. That means Murata makes more money than many Japanese companies with 10 times its sales, such as Matsushita Electric Industrial Co., maker of Panasonic products, which expects a group net profit of only 52 billion yen this fiscal year.
Kyocera is doing even better: It anticipates group profit will more than triple this year to reach 215 billion yen.
The problem is that the profits at component makers jump up and down as demand fluctuates, and at the moment the direction is down, because of slower sales of personal computers and home electronics. "Long-term, they're in a good position. But investors are focused on short-term volatility," says Etsuko Matsuoka, an analyst at UBS Warburg in Tokyo. Ms. Matsuoka forecasts profits will fall in the year ending March 31, 2002, and has "hold" ratings on most of the component makers.
Though analysts don't see nearly as much overstaffing at the components makers as at manufacturers such as Matsushita Electric, some are concerned that they won't be quick to cut costs during the current downturn. Olivier Gayno, president of HSBC Asset Management Japan, says Kyocera, Murata and semiconductor maker Rohm Co. are "good companies" but face less shareholder pressure in the short to medium term. "That's why they have a discount compared to U.S. competitors," Mr. Gayno says.
One company getting attention from foreign investors for its strategy on costs is Hirose Electric Co., a leader in connectors that link, say, computers to hand-held devices. Hirose outsources most of its production, meaning it is easy to cut expenses when demand goes soft. Dan Lucas, an analyst at Credit Suisse First Boston in Tokyo, says Hirose is "one idea for a defensive play."
Both Mr. Lucas and Ms. Matsuoka have "buy" ratings on Hirose, though Mr. Lucas is worried about Hirose's valuation after a recent jump in the share price. Hirose's market capitalization as of Wednesday's close was 31.2 times its expected earnings in the year ending March 31.
Indeed, valuation is a key issue for most of these companies, since there's general agreement that the component makers are well-managed and offer competitive products. Murata looked like a good buy early in mid-March when its shares were available at 19 times earnings; now, with its price-to-earnings ratio at around 25, it is higher than its habitual level in past years.
Still, the components makers have far lower price-to-earnings ratios than sluggish giants such as Matsushita and Fujitsu Ltd. In addition, they have a clear core competence, relatively little competition at the moment from foreign companies and, in many cases, family-led management that runs a tight ship. Given the troubles of Japan's brand-name giants, investors are likely to keep a keen interest in its parts makers for some time to come.
Write to Peter Landers at peter.landers@wsj.com
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