Saturday, November 24, 2007 0 comments ++[ CLICK TO COMMENT ]++

Adding Suruga Corporation to Watch List

(UPDATE: added a minor comment and fixed the market cap (should be $250m not $25m)

(UPDATE 2 (Sat@9:39 PM): I found out accidentally that bigcharts does have a log graph, so I updated the chart with a log graph)

I'm adding Suruga (TSE: 1880) Corporation from Japan to the watch list. I looked at this a while ago when I saw the P/E ratio of around 4 but it turned out to be a mistake due to a stock split. I was thinking of researching Japanese small cap retail, food, and real estate companies (anything to take advantage of strengthening Yen and a possible resurgence in consumption. I came across this again and saw that it has sold off quite a bit since early this year--practically the whole Japanese small cap area is down quite a bit (it might be one of the cheapest on the whole planet).

Just to quickly re-cap, Suruga is in the real estate sector. The whole real estate sector has been doing well over the last few years and Suruga is no exception. The question is whether it can keep it up if hte US economy slows, the Yen strengthens, and the JCB tightens. The chart below plots price and P/E ratio:

(source: bigcharts.com)



(NOTE: I found out that bigcharts.com has a log-graph under their advanced settings so my comment about the flaw is incorrect. However, I'll still keep the original text because it points out something that people should be looking for in graphs:
ORIGINAL: Bigcharts.com has a big flaw with their charts so be careful. The flaw is that these are not log graphs so the graph can be misleading. For example, the move from, say, 500 to 1000 in 2004-2005 is just as big of a move as from 1500 to 3000, even though the latter price change looks massive on that chart. )

I use bigcharts.com charts because it plots P/E ratios and dividend yield (can't find it on any other free chart that I know of). Also note that the P/E ratio shown is likely a mistake (should be around 10 not 3) due to stock split. Nevertheless you can see the historical trend. The price action and P/E ratio seem to be on the lower end. It isn't exactly a true contrarian stock but it isn't popular either.

Quick numbers on Suruga are as follows:

Market cap: US$ 250 million (Yen 25 billion)
Fiscal 07 P/E: 9.2 (approximately)
Fiscal 2008 Forward P/E (management estimate): 7.4
Fiscal 2009 Forward P/E (analyst estimate): 5.1
Price/Book: 1.33
ROE: 15%+

Website: http://www.suruga.com/english/index.html


The numbers look attractive. Anything with a P/E below 8 is worth considering. The big risk is that it's not clear if the earnings numbers, as well as the valuation, are at a cyclical high.

If I feel like taking a position in this stock, I'll do a more detailed analysis. I think Suruga will become attractive if it drops another 20% to 30%, which will bring the forward P/E down to around 5. As I said already, I just don't know if this is a cyclical peak or not.


(If anyone reading this has some ideas for small cap or mid-cap Japanese stocks post them in the comments section. I'm basically looking for anything that will benefit from a strengthening Yen and improving local economy (this means no exporters and others levered to emerging markets))

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