Another profitable Japanese net-net

SPK Corporation (7644.Japan)

Trading at ¥1249 (5/10/11)

SPK Corp is an aftermarket auto parts wholesaler and distributor.  The company is located in Osaka Japan which is south of Tokyo and unaffected by the earthquake.  The company did have a sales office in Sendai, the status of that office is unknown.  The company either manufactures or sources parts such as clutches, transmission assemblies, gaskets, electronics among other items.  SPK also sells aftermarket heavy machinery parts for agriculture and construction equipment.  Overall this is a very boring business, a nice thing about boring businesses is they are easy to understand.  SPK also has a very nice English website that has a nice product catalog, and links to sites where you can actually buy the products.  The procurement sites are all in Japanese, so if you wanted to buy a gasket and examine the quality you will need to use a translator or read Japanese.

-Sales increased YoY from 2009, the company hasn't experienced a loss in the last five years through the midst of the recession.
-The earnings quality is pretty good, balance sheet accruals at 7% and cash flow accruals at 2.8%, both good measures.
-Cash taxes paid on EBT comes out to a 36% effective tax rate which is in line with Japanese taxes.
-Cash from operations has been positive for the last five years as well.  During the same time period cash balances increased in all years except for one.
-Cash and book value have been steadily growing.
-EV/EBIT of 2.93
-Dividend yield of 4.2% for 2012 paid in two installments, mid year and end of the year.


Here is my net-net worksheet for SPK:

To determine the quality of earnings I ran the numbers through my accrual worksheet:

Historic statements can be found on the numbers for SPK are accurate, will give a five year view, because of this I didn't enter the historical income statements into my own spreadsheet, why duplicate the work.  Get the statements here.

To figure out what a good value is I'll examine a few scenarios.

Scenario 1: Asset value realized
The stock is trading below NCAV, very close to discounted net working capital, cash is 62% of share price.  If the company rises to it's net current asset value it would be a 36% increase in share price.  Another measure to consider is that if the shares trade up to book value it would be a 60% increase in share price.  I think there is more value than just rising to NCAV or to book value, the company is profitable and cash flow positive.

Scenario 2: Earnings value + cash 
If we take a 10x multiple on the current year earnings and add in the cash:
10x ¥124 = ¥1240 + ¥775 = ¥2015 per share a 61% increase from the current price.

Scenario 3: 2012 earnings + cash
If we put a 10x multiple on the EPS estimate management provides in the annual report:
10x ¥141 = ¥1410 + ¥775 = ¥2185 a 75% increase from the current price.

Scenario 4: Earnings grow to 2007 level, asset value never realized
If the market never recognizes the value of the assets and earnings grow to their 2007 level and the multiple stays the same it would be a 25% increase in share price from here.

-Tied to the auto industry which is at a practical standstill after the earthquake, Japanese car factories are idled or operating at low capacity.
-The company is a small cap stock, with a market cap of approx $100m.
-Due to being a small cap stock it's also pretty illiquid, with an average of 4k shares trading a day.  The block size for SPK is 100 shares or about $1600 per block.  The shares do trade almost all days, I was able to get a fill for my shares somewhat quickly after I placed my order.
-Building a $100k position at 25% of the daily volume would take about 7 trading days.
-The company earns a low ROIC, low ROE, low ROA, and has a large balance of cash that slowly is expanding, it could trade at a discount to NCAV for a long time.
-In the last five years the shares performed terribly:
   2006: -17.37%
   2007: -33.28%
   2008: -6.61%
   2009: 4.2% (only gain)
   2010: -8.29%

Talk to Nate about SPK Corp or anything else on your mind.

Disclosure: I am long 7466 SPK Corp

Additional resources:
The company's website
The latest annual filing in English


  1. This may be a dumb question, but why do you analyse the quality of earnings instead of looking to fcf? As I understand it, fcf is what drives the business, not the income statement's earnings...

  2. Not a dumb question at all, actually a great question. There's actually a bit more to my analysis than I post on the blog which might or might not be obvious in the posts. My goal per post is to give a good outline from which an investor can jump start their own research. At least that's my hope, I have no idea if anyone is actually doing further research or buying any of these stocks.

    I agree that cash generation is much more important than earnings power and this is something I do take quite a good look at. I like to work in the order I describe in the Dainichi post. I check to make sure the balance sheet is decent, then earnings, and use cash flow to verify that earnings are real or good.

    I have some cash flow worksheets I go through, including building out a direct cash flow statement so I can see how cash is generated or utilized. I also use operating earnings a lot which is a very poor man's cash flow, this is seen in the EV/EBIT calculations.

    The reason I look at earnings and discuss them verses only focusing on cash flow is because that's what the market looks at. In addition for a company that has high quality earnings cash and earnings should line up pretty closely over time.

    In the case of SPK they do have decent FCF as defined by CFO-capex and they use a lot of it to pay out a dividend. There is minimal capex and most of the cash flow is paid out in dividends or added back to the cash balance.

    One last note is I'm a bit dubious of FCF meaning CFO - capex or maint capex. I think accurate FCF is actually working up a normalized CFO for average working capital items and removing corporate fat. In the case of examining a net-net I want to ensure it's cheap, and make sure the operating business isn't destroying the balance sheet value.

  3. Very interesting Nate! My wife is there any info written in Japanese that you would like to have the translation? I am also interested in this stock.

  4. Charles,

    You are in luck when looking at cheap Japanese stocks. I am able to get along fine reading the statements with a translator, what I have trouble finding is news items about the companies. Most news stories are in the local language and I don't speak Japanese. If you have any luck finding anything local about some of these companies it would be helpful. Thanks for the offer.


  5. I added two links to the bottom of this post, the company website and their English filings. I can't believe I forgot to do that originally.

  6. This might not be very helpful but my wife looked on the web for some news but actually hard to find. She uses -- but for each Japanese stock there is like a blog/forum where many comments on the stock and yes many came to the same conclusion as you: it is a very interesting net-net. But I wish we could get additional info....aww those Japanese - so mysterious!