Is it Time to Become Big in Japan?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the beginning of the year the "currencies wars" have taken another step forward. The recent developments are coming from Japan. The political change in Japan and the decisions of Bank of Japan in the past several months to take its monetary policy to the next level are among the contributing factors for the devaluation of the Japanese yen. This shift brings uncertainty to the region, but could also prove to be beneficial over time to leading Japanese companies.
The Japanese yen has tumbled down by nearly 7.8% against the USD since the beginning of the year. The decision of the newly elected Prime Minister Shinzo Abe to augment the government spending along with the Bank of Japan's (pdf file) decision to expand its asset purchase program and to raise inflation target from 1% to 2% have also contributed to the depreciation of the Japanese yen against other leading currencies. The government and BOJ are expected to take further steps to jump start the Japanese economy, which will likely further depreciate the Japanese currency. If the Japanese yen will continue to fall, then leading Japanese companies that export their goods and services are likely to benefit from this development.
It's worth mentioning several Japanese companies that are likely to augment their revenues on account of these changes. Many leading Japanese companies haven't performed well in recent years. Such companies, such as Sony (NYSE: SNE) or Toyota (NYSE: TM) are seeking growth and stability. During 2012, Sony's revenues fell by nearly 9.6%. This drop in revenues also led the company to record a sharp fall in its operating profitability from a 3% in 2011 to 1% loss in 2012. This company's free cash flow is negative and reached in 2012 around ($4 billion) compared to ($1 billion) in 2011. Nonetheless, Sony still has nearly $7.7 billion in cash. But another two more years like 2012 and Sony might erase its cash deposits. The depreciation of the Japanese yen could make Sony more competitive in its industry, but without a rise in revenues, it won't help the company over time. Despite the company’s revenues fall in 2012, its stock jumped by almost 27% since the beginning of the year. Some suspect the yard sales of the company's assets including after it had sold its main offices in New York for $1.1 billion. Even if this is the case, the company's cash situation will continue to be a risk issue.
Toyota’s situation isn’t much better as its revenues fell by 2.2% during 2012. Its profit margin is also low but stable at 2%. Nearly 75% of the company’s revenues are from aboard with North America leading the board at 28%. So from the revenues stand point, for a every 1% drop in the Japanese yen against other currencies, may lead, assuming all things equal, to a 0.75% rise in its revenues.
Toshiba (NASDAQOTH: TOSBF) also hasn't performed well in 2012 and its net sales in the first nine months of 2012 declined by 7.1%. Since this company's international revenues account for 56% of the total net sales, a drop in Japanese currency by 10%, assuming all things equal, will lead to a gain of 5.6% in total revenues, or another $2.5 billion gain in sales. This won’t compensate for the company’s drop in revenues, but might curb its fall.
Japan Tobacco International is another leading Japanese company, but its situation is much better than the Japanese companies listed above. This company's revenues grew by nearly 4.7% in 2012 and its operating profit margin is set at 14%. Since this company's international revenues account for nearly 38% of its total revenues, for every 10% drop in Japanese yen, assuming all things equal, the total revenues of Japan Tobacco will rise by 3.8%. This company's stock, much like Sony’s, has also taken off in 2013 as it spiked by 20.5%.
Some of the companies I have listed above may not be the best investment available, but should bring to mind that if the macroeconomic condition in Japan will lead to the devaluation of the Japanese yen, this could also raise these companies’ revenues, which will likely to reflect in their stock price.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
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