The Fallen Angel - Mabuchi Motors (JP:6592)

Company Overview

Mabuchi Motor Co., Ltd., together with its subsidiaries, engages in the manufacture and sale of small electric motors. Mabuchi has got four business segments. The largest segement by sale is automotive product market. Major applications are power window lifters, car mirrors, door lock actuators, headlights, steering locks, power seats/seat belts, and electric parking brakes. The second biggest segment is the home appliances, power tools and toys, which produces RC motors for hair dryers, electric shavers, tooth brushes, vacuum cleaners, drill/screwdrivers, circular saws, toys and models, and radio control models. The third largest segment is optical and precision instruments, that produces motors used in optical and precision instruments in the areas of inkjet printers, copy machines. The fourth largest segment is audio and visual equipment, which produces motors for CD/DVD-ROM drives, DVD players/recorders, car CD players. The company was founded in 1954 and is headquartered in Matsudo City, Japan, but its production sites are outside Japan, mainly in east-/ south-east Asia.


For further insight on Mabuchi Motors I recommend reading the following link:

http://www.referenceforbusiness.com/history2/24/Mabuchi-Motor-Co-Ltd.html

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Analysis of Operation

Mabuchi Motors is the world market leader for small RC-motors.  Mabuchi Motors has been through a rough time during the last decade. Main reason (among others) was an alomst complete breakdown of Mabuchi's most important market segement (motors for cd and dvd players (audio visual)) with the introduction and successful market penetration of MP3 players.

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From being the most important contributor to overall sales around the year 2000, the audio visual segement is almost negligible in 2011. Such a breakdown in sales volume is dramatic for a company with huge operational leverage and is reflected dramatically in a drastic margin compression. Overall sales decreased by roughly 30% and sales composition by application has changed dramatically, with small motors for automotive applications (car mirror motors, power seat motors, power window lifters etc.) being the most important business segment for Mabuchi by now. But due to problems in the auto industries (especially in Japan) in the last years, it was impossible for that segment to compensate the decline in the audio visual segment.

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Mabuchi used to have extremely strong margin readings in the past, due to good capacity utilisation. With the breakdown of  its audio/visual business segment, it has been fighting with huge overcapacitity for quite some time now. Although, Mabuchi is very determent and successful in cost cutting measures (cut of workforce, increase of plant efficiency, etc.) it hasn't been enough to get margins back on track. Increase in input costs (copper; rare earth materials) and the strong yen didn't help neither.

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Margin compression is refelected in a huge depression of ROE,ROA and EPS readings during the last decade. Given those adverse operational headwinds Mabuchi Motors is facing, it comes as a surpirse that management was able to avoid any operational losses.

 

Analysis of Cash-flow

Mabuchi's business used to be a huge cash cow.

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Depressed sales and compressed margins are also reflected in its cash-flow readings. In fiscal year 2011 Mabuchi posted its first negative free cash-flow in 14 years.

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Beside the fact of net- income not being a significant contributor to operating cash-flow for quite some time, also the steady decrease of depreciation during the last 13 years hasn't had a mitigating effect on depressed operating cash-flow.

Summary: Operationally Mabuchi has been in the doldrums. It ugently needs new application for its motors to improve capacity utilisation, which would improve its margins significantly.

So why am I buying into the company?

 

Analysis of Balance Sheet

The answer is to be found in Mabuchi's balance sheet. It's rock solid!

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Mabuchi Motors is debt free and has very little overall liabilities. It's slightly trading above NCAV (=current assets - all liabilities) and slightly below liquidation value + Investment portfolio.

That is extremely cheap. Keep in mind, Mabuchi isn't some niche player. It is a market leader in many of its motor applications, with market shares partially around 90% (at some automotive applications).

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Although, operational cash-flow is hoovering around very depressed levels, no liquidity issue can be expected in the immediate/ midterm timeframe. Liquid assets are surpassing current liabilities by a huge margin.
Current ratio (current assets/current liabilities) stands around 12, and the more stringent acid test ((current assets - inventory)/current liabilities)) at around 10.

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Cash and short-term investments represent 66% of total market cap. The other investment portfolio (mid-/longterm) stands at 25% of Mabuchi's market cap. Basically, at today prices an investor does get a pile of cash and (mid-/longterm) investments and doesn't have to pay anything for Mabuchi's business at all.

Analysis of Pay-Out

 Mabuchi does pay a dividend of 100 yen. 60 yen is a fixed amount, payed independently of business condition. 40 yen is said to be variable, depending on business condition. Although business has been detoriating for a while now, Mabuchi has never slashed the variable part of the dividend.

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Mabuchi has been buying back shares. Unfortunately, the first share buyback in 2002-2004, where mainly the company's founders were unloading there stocks. was more than dissatisfactory. During that time stock price was way too high to justify such a huge share repurchase. Beneficaries of that transaction was solely the mabuchi family, to the detriment of the other (remaining) shareholders.

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The share repurchase of 2007/2008 was much better, as shareprices were depressed in such an extent, that a sharerepurchase was in the interest of (all) shareholders.

Conclusion

Usually I do not buy into a capital intensive business with depressed free-cash flow readings, as free-cash flow (and operating cash-flow) is my most important indicator for valuation.

But with Mabuchi Motors, I am more than happy to transgress against the virtue of submissiveness.
 
Mabuchi is a world class company in what it does and has shown time and again, that it is able to overcome adverse operational conditions.


The total collapse of an entire businesssegment (or application) is not new to Mabuchi. For example, Mabuchi used to be the market leader for small electro motors used in walkmans and tape decks. We all know  what happened to cassette recorders. They became obsolete, but Mabuchi Motors is still around.

This time will not be different and Mabuchi will find new applications for its products. It will be hard for the company to get back to former glory. But in my opinion the stockprice (in relation to retained value in its books) is so depressed, that it doesn't have to for giving an investor decent returns in the future.





Disclosure: Long Mabuchi Motors (JP:6592)