Japan is the home of a rich history and culture, as well as many great companies. The Japanese economy had a major boom during the 1980s and the country was poised to overtake the U.S. However, its market bubble popped in the early 1990s. Since then, its economy has been in a period of stagflation. Over 30 years later, the Nikkei 225 Index has just recovered to historic levels.
Further, the country executed one of the best-performing lockdown strategies for Covid-19 in 2020 and was minimally affected by the pandemic.
Oxford Economics estimates “resiliant” gross domestic product growth in Japan of 0.9% for 2023. This is much better than the U.S. and Europe, which have a recession forecasted by economists.
In this discussion, I will dive into two large Japanese conglomerate stocks that offer international diversification.
Sony
Sony Group Corp. (SONY, Financial) is a Japanese technology conglomerate that was founded in 1946, just after the end of World War II. The company is most famous its PlayStation gaming console. Its PlayStation 1 was a pioneer in the gaming industry, while the company’s PlayStation 2 still wears the crown for being the best-selling console of all time. In recent years, the company has faced increased competition from Microsoft's (MSFT, Financial) Xbox and Nintento (TSE:7974, Financial). However, console data by WePC indicates Sony is still the market leader with 50% market share, above Nintendo at 28% and Xbox at around 11%.
Sony is not just a gaming company, though. It also offers a variety of consumer electronics, including TVs, headphones and cameras. In addition, the company is the world's largest music publisher, controlling an estimated 5.46 million songs. Its popular artists include Prince, Beyonce, DJ Khaled, Shakria, Harry Styles and even Michael Jackson.
The company also owns a movie studio (Sony Pictures), which offers a range of iconic titles, from the Spider-Man and Karate Kid franchises to "Spectre," a James Bond movie.
But that is not all; Sony also develops semiconductors and has a 55% share of the image sensor market for cameras. In addition, the company has a financial services and health care business. I believe the company's immense diversification is a major positive for investors as it means Sony is not prone to cyclical demand from any one segment. However, it may be less focused than a company that concentrates on a single industry.
Solid financials
In November, Sony reported solid financial results for its fiscal second quarter of 2022, which ended Sept. 30. Revenue was $19.2 billion (2.75 trillion yen), which increased by 16% year over year.
The company reported a solid 17% increase in its Game & Network Services segment, which grew to $5.5 billion. This growth was despite foreign exchange headwinds and declining third-party software sales. The gaming market is going through a cyclical downturn currently, so this is a strong result overall. Its number of PlayStation Plus subscriber accounts declined by 4% sequentially to 45.4 million.
In regard to profitability, the company reported $2.4 billion in operating income. This increased by a solid 8% year over year. Income before taxes increased by a greater amount. with 22% growth reported to $2.65 billion.
Sony also reported a strong balance sheet with cash and short-term investments of $4.5 billion. As expected with a legacy conglomerate, the company does have high total debt of $25 billion. A positive is this looks to include operating leases and thus, its true long-term debt is closer to $5 billion, although the data is scarce.
Valuation and investors
Sony trades with a price-sales ratio of 1.1, which is 98% cheaper than its five-year average. The GF Value Line indicates a fair value of $98 per share, so the stock is modestly undervalued based on its historical ratios, past financial performance and analysts' future earnings projections.
According to 13F filings, Jim Simons (Trades, Portfolio)' Renaissance Technologies, Tom Gayner (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) bought shares in the third quarter of 2022. The stock traded at an average price of around $80 per share. This buy point is approximately 5% more expensive than where the stock trades as of the time of writing.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Mitsubishi
Mitsubishi Corp. (MSBHF, Financial) is another major Japanese conglomerate which has operations across a variety of business segments. For example, the company has an energy business, which is involved in the exploration and production of oil and gas. Given the increasing need for energy security and rising oil and gas prices, this segment acts as a strong hedge against energy inflation. The company also has businesses in a variety of industrial segments, which include the following:
- Metals: Mining and processing of metals, including copper, aluminum and steel.
- Machinery: It is involved in the manufacture, sale and maintenance of a range of industrial machinery.
- Chemicals: This segment sells chemical products, including petrochemicals and pharmaceuticals.
- Infrastructure projects in the transportation, telecommunications,and utility industry.
Solid financials
Mitsubishi reported solid financials for the third quarter of 2022. Revenue was a staggering $36.47 billion, which increased by 3.2% year over year. This may not seem like a fast growth rate, but slow growth is expected for a mature company.
As a comparison, the company reported negative revenue growth rates in 2020. But its sales rebounded strong in 2021 with growth rates of between 17% and 20% reported.
In terms of profitability, Mitsubishi reported $940.2 million in operating income. This declined by 3.63% year over year. The decline may seem like an issue but this comes after huge income growth of over 297% in the prior quarter.
Mitsubishi has $10.694 billion in cash and short term investments on its balance sheet. Similar to many other conglomerates, the company has very high debt, which equates to an eye watering $47 billion. A positive is I believe this includes non interest bearing leases and a large portion (over $25 billion) is long term debt.
Valuation
Mitsubishi trades at a price-sales ratio of 0.34, which is 98% cheaper than its five-year average.
The GF Value chart indicates a fair value of $32 per share for the stock and rates it as fairly valued.
In 2020, Warren Buffett (Trades, Portfolio) of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) built up large stakes (around 5%) in several Japanese companies, one of which was Mitsubishi.
Final thoughts
Both Sony and Mitsubishi are two Goliaths of Japan. The companies are diversified across industries and thus are less prone to the industry demand characteristics of any single segment. Mitusubishi acts as a hedge against rising energy prices, while Sony has a dominant position in the gaming market. Both conglomerates have multinational operations, which further diversifies revenue. I believe the stocks of both companies are undervalued at the time of writing and could thus offer a great way to diversify your portfolio.
