Stocks for the 21st Year of Japan's "Lost Decade"

By Jonathan Yates - August 14, 2012 | Tickers: CAJ, HMC, NTT, SNE, TM | 0 Comments

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As Japan moves well into the 21st year of its "Lost Decade," there are publicly traded companies on the island nation that are very appealing investments.  While Japan is nowhere near recovering from the "Lost Decade" that began in the early 1990s and has demographics working against it with a rapidly aging populace, it does have many firms that are among the tops in the sector of each.  Japan is a wealthy nation with a high savings rate and sizable foreign reserves so investors should want exposure to the best the economy has to offer.

If it was not for Toyota Motor Corp. (NYSE: TM) and Honda Motor Co. (NYSE: HMC), American automobiles might not have improved so much over the past decades.  Far superior motor vehicles, particularly in the economy group, from Toyota and Honda pushed, Ford, General Motors and Chrysler to the brink and beyond.  Until last year, Toyota sold more motor vehicles than any other company in the world, but floods at factories in Thailand crimped production.  While Toyota Motor is up more than 23% for 2012, its price-to-book ratio is just 0.96 and its price-to-sales ratio is only 0.53.  Each dollar of sales for Toyota is now selling for only 53 cents based on the stock price, while its assets are being discounted by 4%.  Ford has a price-to-book ratio of 2.37, in comparison.

For Honda Motors, which has risen 4.94% for the year, the price-to-sales ratio is 0.53.  Both Honda and Toyota have very appealing price-to-earnings (PEG) ratios.  While a PEG of 1 is adequate (and the lower the better), the PEG for Honda is 0.75.  For Toyota, the PEG is only 0.40.  In addition to the future earnings growth, Toyota and Honda have dividend income frameworks that are very conducive to increasing the yield in the future as the present dividend payout ratio is very low.

Nippon Telephone & Telegraph (NYSE: NTT) also has very attractive valuations, along with a dividend income that could easily grow in the future.  At present, the dividend yield for NTT is 2.60% with a payout ratio of just 37.26%.  The average dividend for a member of the Standard & Poor's 500 Index is around 2% with the historic dividend ratio being about 50%.  In terms of price-to-book, Nippon Telephone & Telegraph is selling at a 0.58 ratio.  The price-to-sales ratio is 0.47.  By contrast, the price-to-book ratio for AT&T is 2.11 and its price-to-sales ratio is 1.71.  The phone company is always a solid way to profit from an economy.

While Samsung of South Korea is the king of mobile phone sales, Sony Corporation (NYSE: SNE) and Canon (NYSE: CAJ) are still royalty in consumer electronic sales.  It has been a difficult year of Sony, maker of televisions and home audio systems, with the share price lower by 43.37%.  But Sony Corporation is up 6.01% for the last week of market action. 

Rather than being priced like a company that is rebounding with earnings-per-share growth projected to grow by more than 400% next year with a forward price-to-earnings ratio of just 7.35, Sony has valuations like an entity headed for Chapter 11 with a low, low price-to-sales ratio of only 0.15 and a price-to-book ratio of just 0.50.   Now trading around $12.30 a share, the mean analyst target price for Sony Corporation over the next year of market action is $17.24.  Also bullish for Sony Corporation is the low short float of just 1.28% (a short float of 5% is considered to be troubling for a company).

Canon is profitable with sales and earnings-per-share growth both increasing.  For Canon, known primarily for its cameras, the profit margin is 7.19%.  On a quarterly basis, sales growth is higher by 7.49%, reversing the decline over the past five years.  Earnings-per-share growth this year is only 2.40% and projected to be 3.70% for the next five years.  But the dividend income of Canon compensates for the woeful share performance.  At present, the dividend yield for Canon is 4.53%.  The company has a very sustainable payout ratio and no debt on the balance sheet.

These firms have all made it through the years and years of the "Lost Decade" for Japan.  Growth for these exporting Japanese companies and profits for the shareholders will not evolve domestically.  However, Japan is well-placed to gain from the expansion of the consumer class in emerging market nations, particularly those in Asia.  Even during The Great Recession, the middle class in emerging markets burgeoned.

According to "Winning the $30 Trillion Decathalon," a recent report by McKinsey & Co., the global consulting firm, this trend will continue.  The report states that yearly consumption in emerging markets will reach $30 trillion by 2025 (which could be the 34th year of Japan's "Lost Decade").  That will be almost half the total for the entire world.  Toyota, Honda, Canon and Sony are all well-positioned to profit from that expected growth.

In addition, the Bank of Japan has been very active in implementing quantitative easing measures to reduce the value of the yen, resulting in Japanese exports being more competitive in foreign markets.  When the yen is priced lower, products from Japanese companies are that much cheaper abroad.  That will make Japanese motor vehicles, consumer electronic products and other goods even more attractive for the $30 trillion that will be spent annually by just emerging market consumers, not to mention those in the United States, Europe and other regions that already prefer Toyota automobiles and Canon cameras, among other items.

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