´´ The Muddy - Fukuda Denshi (JP:6960)

Thursday, May 17, 2012

The Muddy - Fukuda Denshi (JP:6960)

Company Overview

Fukuda Denshi Co., Ltd was founded in 1935 and is headquartered in Tokyo, Japan..It engages in the development, manufacture, sale, import, and export of medical electronic devices, mainly in Japan.

The company’s principal products include electrocardiograms, ultrasound imaging equipment and patient monitoring systems. In addition to its own products, Fukuda imports and sells medical equipment to the Japanese market. This includes pacemakers, defibrillators, heart catheters and other devices and equipment produced by companies such as St Jude Medical, Philips Medical Systems and Volcano Corporation. Fukuda also offers a variety of rental equipment in Japan, including oxygen enrichers, oxygen tanks and other oxygen therapy equipment, sleep apnoea devices, polygraphs and continuous positive airway pressure -based respirators.

(click chart to enlarge)


Analysis of Operation

Fukuda Denshi has never had a loss year in the last 13 years. The average growth rate of its sales has been 3,7% in the last 13 years, but sales growth has stalled lately.

(click chart to enlarge)


Although sales have been growing, Fukuda's operating margins were under severe pressure from 2000 til 2007. This was mainly due to cost of goods sold and selling, general and administrive costs growing faster than its sales. 

It looks like Fukuda has got its cost base under control again. Margins bottemd out in 2007 and a slow but steady margin recovery is taking place.

(click chart to enlarge)


Average EPS (13 years) is ¥178, leaving us with an average P/E ratio of 14.1
Actual EPS (2011) is higher with ¥211, leading us to an actual P/E of 11.

ROE and ROA averages are 5,5% and 3,7% respectively. Actual readings are 5,4% and 4%.

The lower reading in actual ROE is mainly attributable to a significant increase in Fukuda's book value over the last 13 years (see Analysis of Balance Sheet).

Analysis of Cash-Flow

Cash-Flow generation is Fukuda's strong suit. It's never had a negative free cash-flow in the last 13 years. And also the stricter version of free cash-flow (OCF-CFI) turned negative in only one year (2008)

(click chart to enlarge)


 Fukuda has always been a huge cash generator. But it seems that in 2009 they started there afterburner and operating cash-flow increased significantly from a high plateau. 

Operating cash-flow averaged ¥361 (10 years), leaving us with an P/OCF ratio of 7. Actual operating cash-flow is significantly higher with ¥709 ==> P/OCF (actual) of roughly 3.

Average free cash-flow is ¥210 ==> FCF yield (aver.) of 8,7%.
Actual free cash-flow is with ¥438 significantly higher ==> FCF yield (actual) of 18%

Fukuda achieved those free cash-flow readings despite a significant increase in Capex expenditure.

(click chart to enlarge)

Balance Sheet

Fukuda Denshi has almost no debt on its balance sheet and balance sheet composition is rock solid.

Fukuda is currently valued at a price to sales ratio of 0,5 and a price to book ratio of 0,6.

Current Assets and Current Liabilities

Although Fukuda Denshi delivers a recent return on income and very good return on cash flow, it is only trading at roughly two times its liquidation value. Liquidation value is high due to the fact, that most of Fukuda's current assets are in cash and receivables.

(click chart to enlarge)


Not included in the liquidation value is a big investment portfolio, which is currently valued at ¥ 862 per share.

(click chart to enlarge)

Current ratio and acid test are more than satisfactorily (actually they are too high) and the slight decrease lately is due to significant share buy backs, which have depleted a bit of its cash holdings.

(click chart to enlarge)

Cash holdings have been rather stable in the last 11 years, but investment holdings seeing a significant increase lately, as Fukuda Denshi has been investing a huge chunk of its free cash flow in securities.

Property, Plant and Equipment

PP&E on Fukuda's balance sheet is valued at cost and amounts for ¥ 19.690 (Mios) or ¥ 1014 per share.

Book Value

(click chart to enlarge)

Fukuda Denshi has been constantly growing its book value for 13 years at an average growth-rate of 4,6% p.a..

Analysis of Dividend and Treasury Stocks

From 1998 til 2005 dividend pay-out was paltry at Fukuda Denshi. But in 2006 pay-out to shareholders got a nice boost. The motive for increasing the pay-out ratio significantly was pressure from an activist shareholder (Steel Partners). At the peak of his activism Steel Partners held 14,6 % of the outstanding shares.

(click chart to enlarge)

Steel Partner's proposal to Fukuda's management didn't provide for share buy-backs, but a pay-out of ¥ 140 in dividends, which it deemed reasonable, given the earning power Fukuda Denshi was showing during that period.

(click chart to enlarge)

Corporate Governance

Well and here comes the whole story of Fukuda Denshi.

Mr. Fukuda wasn't amused at all having Steel Partners on board. Although he gave in a bit by increasing the dividend to ¥ 80 (from ¥  40), he also pushed through a poison pill arrangement at the general shareholder meeting, threatening to dilute any current and future shareholdings of potential acquirers, should Steel Partners attempt to raise its holding further.

To show Fukuda Denshi was damn serious about that, it issued stocks and disposed treasury stocks in 2005.

(click chart to enlarge)

There wasn't anything detrimental by Steel Partner's proposal to Fukuda Denshi's future business or financial position. It was, and still is, legitimate to ask the management to let the shareholders participate on the company's free cash-flow stream by an appropriate amount, and neither would it have tapped on any reserves the company might have needed to fund future expansion. nor would it have had an impediment to the replacement of the company's capital stock. The same still holds true as of today. Contrary to what Fukuda's management is claiming, the company was and is overcapitalized and higher (transparent) pay-outs to stockholders are still warranted.

Although, the company has been buying back a significant amount of its stock, which is laudable, it isn't done in a transparent matter. The transaction at the end of 2010 was done on the market. But there was no liquidity to speak of in the stock at that time. So who sold? How did the arrangement between the company and the willing seller looked like? Neither is there any information about those issues to be found on the homepage, nor does the management explain what its intention is regarding its policy on treasruy shares (e.g. acquisition currency in the future, retirement, etc.). That is the case, even though the management had promised the following:

(click chart to enlarge)

The second significant buy-back took place in the end of 2011. It was conducted through a takeover offer to all its shareholders. If liquidity isn't sufficent to buy back the shares on the market, this is the way a share repurchase should be executed. All sharesholders, who have the intention to sell its stake in the company, should be given equal opportunity to do so.

Atomic Sangkyo, major shareholder at Fukuda Denshi and 100% owned by the founder's family, sold some of its holdings for a ridiculous low price. That is ok with me. But again, I would like to get an explanation what the intention is.

Another issue (where we have had promises but no action) that needs to be adressed is to tackle the liquidity issues in the share.

Here is what the management has to say about that topic.
(click chart to enlarge)

But nothing has happened. Liquidiy is abysmal for a stock with a rougly 50 bln. yen market cap. And by the way. What happened to volume in mid 2009? Is that Steel Partners disposing of its holdings? Maybe to Atomic Sangkyo? I'm fishing in muddy water here and that is due to a lack of transparency on the management's side.

(click chart to enlarge)

The intention of this paragraph isn't to cast any doubt on the integrity of Mr.Fukuda or the management. I've got great respect for the long-term succeses that have been archieved and  how management has been steering the company through a rough sea.

Furthermore, I'm not questioning the stakeholder approach the company is following, as I am an advocaat of rethinking the anglo-saxon model of maximising (short-term) shareholder value at the expense of other stakeholders and the long term financial viablity of a company.

But, as much coporate governance is tilting to one extreme in the western hemisphere (e.g. shareholder value maximization and unjust enrichment of management), in many cases it does so in Japan (e.g. shareholder rights are neglected). A more balanced approach has to be found, where it's acknowledged that shareholders are a very important stakeholder in the company (definetly more so than the supplier of a company). Legitemate propoals by shareholders (in the end it is us, who got the residual claim on a company and bearing the greatest deal of the risk of failure) have to be acknowledged, as well as adressed by management and transparency of managerial action regarding the financial structure (among others) is paramount.


All operational, balance sheet and cash- flow metrics Fukuda Denshi is showing make up for a great company that is significantly undervalued. But corporate governance and a lack of transparency is a huge negative.

To all people who are investing in Japan, irrespectively of net-net stocks or issues that sell at a premium, I only can recommend not to discard corporate governance issues in the japanese market. Having said that, that also holds true (and might even be a more pressing issue) for the western markets (e.g obscene compensation structure, dubious accounting, etc).

Disclosure: long Fukuda Denshi (JP:6960)


  1. Great article, it is refreshing that there is someone outthere looking into the forgotten value cases in Japan. Have you looked at: Medikit (7749), Nafco (2790), Nippon Pillar (6490), SK Kaken (3280), Daiwa Ind (5459)?
    There are a few value cases to dig into..

    1. Thanks. Quite satisfied with this article too. Was easy to write, as quantitive metrics of this stock are unbelievably strong and some decent corporate action (share buyback; special dividend) is going on. On the other hand corporate action is also quite obscure, as I mentioned in the article and the volume in the stock is a joke.

      I've looked at a few of the stocks you've mentioned. They all have one thing in common, they haven't got an ir page in english. As my japanese is a little rusty they are uninvestable for me.

      Two of that stocks are in the chemical business, a segment I find very interesting in Japan.

  2. Two other companies with bigger cash positions than market caps are:
    Heian Cermony Services (9776) and Sapporo Clinical Labs (9776). Both running profitable businesses in the funeral services and pharmacy dispensing industries. Could be worth taking a look at.
    Take note, 9776 is extremely illiquid though.

    1. Thanks for the tips.

      There are loads of Graham and Dodd net-nets out there in Japan.

      They come in different flavours (e.g different asset/liability composition), but even companies that have been showing longterm profitability trade below net current asset value or even at or below liquidation value.

      What you will need is a strong stomache and a lot of patience investing in Japan.