The stock of Japan Tobacco (OTCPK:JAPAY, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $9.6899 per share and the market cap of $34.4 billion, Japan Tobacco stock is estimated to be fairly valued. GF Value for Japan Tobacco is shown in the chart below.
Because Japan Tobacco is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Japan Tobacco has a cash-to-debt ratio of 0.45, which is in the middle range of the companies in Tobacco Products industry. GuruFocus ranks the overall financial strength of Japan Tobacco at 5 out of 10, which indicates that the financial strength of Japan Tobacco is fair. This is the debt and cash of Japan Tobacco over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Japan Tobacco has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $19.9 billion and earnings of $0.89 a share. Its operating margin is 23.40%, which ranks in the middle range of the companies in Tobacco Products industry. Overall, GuruFocus ranks the profitability of Japan Tobacco at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Japan Tobacco over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Japan Tobacco is -0.4%, which ranks in the middle range of the companies in Tobacco Products industry. The 3-year average EBITDA growth rate is -2.1%, which ranks in the middle range of the companies in Tobacco Products industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Japan Tobacco's ROIC is 8.20 while its WACC came in at 3.66. The historical ROIC vs WACC comparison of Japan Tobacco is shown below:
In closing, Japan Tobacco (OTCPK:JAPAY, 30-year Financials) stock appears to be fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Tobacco Products industry. To learn more about Japan Tobacco stock, you can check out its 30-year Financials here.
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