I love automobiles. I think, as an American, there is some sort of obligation to have a love affair with metal and horsepower when they are combined and put on top of wheels. As an investor, I have never cared much for car makers. The business is capital intensive and suffers from dramatic over capacity.
I also don’t recall ever buying a stock that was traded on the over the counter market, commonly referred to as “pink sheets”. I have always thought the stocks traded there were micro-cap businesses with very slight chances of survival. These are just not the type of businesses that are going to generate much interest from a value investor such as myself. But, in my opinion, one of the most important aspects of being a successful investor is a willingness to investigate all potential opportunities prior to making a decision to discard them to the trash file.
Life And Research Are Full Of Surprises
When I was reviewing the results of my stock screens last night, a five letter symbol (usually indicative of an over-the-counter stock) showed up on one of my low-priced indicator screens. The metrics used in the search and the impressive returned by this business compelled me to look further. Imagine my surprise when I entered the ticker symbol and found myself looking at a quote for Nissan Motor Company (NSANY, Financial)! It would have never occurred to me that a business of this size would trade on pink sheets in the U.S. market, but it does.
It is a bit ironic that I spend so many hours a day analyzing stocks but have never analyzed Nissan. Part of the irony in this is that I drive past their Smyrna, Tennessee plant two times every day and see the parking lot filled with the cars of the thousands of employees who work there. Another interesting aspect of the irony is that a business that used to rent my services has their corporate office just down the street from Nissan’s North American headquarters and I watched as it was constructed. Yet, I never thought to analyze the stock. But, that was then, this is now and now I have analyzed it.
Value Is Where You Find It; Not Where You Expect It
Peter Lynch once said that you should never invest in a business you don’t understand. I don’t adhere to that philosophy 100% but I do refuse to invest in any business where I don’t understand the numbers or the approach they take to business that is going to provide a superior return on my capital. In that regard, Nissan falls right in my wheelhouse. You see, I have spent my entire career in manufacturing and the vast majority of that time has been spent in the metal fabrication industry. I understand how they operate and I understand the differences that separate the great manufacturing companies from the poor ones.
Nissan is a business that operates itself in a way that produces exceptional performance in a very competitive industry. They maintain very high expectations for every employee in the company and they encourage their employees to actively participate in helping to improve the way things are done on a daily basis. They are not afraid to challenge their team to get better each day and they have built a team that strives to achieve that goal every day. It also operates in an industry with very high barriers to entry.
Nissan is also a business that, at least in Smyrna, Tennessee, rewards its employees with exceptional pay and benefit packages and is considered one of the premium employers in the area. I know some people who work for the company and they work hard, very hard. If they don’t work hard, they don’t work for Nissan at any level. I like to hear that about a business in which I am considering investing my capital; a demanding employer that holds the respect of its employees and the community. But, there is something I like seeing even more.
Compelling Value Is Always Required
Even though I really like the way Nissan operates its business, I always insist on compelling value with a margin of safety and prospects for exceptional returns before I allocate my capital to any investment. Here again, Nissan delivers. Most good to excellent businesses normally trade at a 10% or greater valuation to their book value. Book value is generally considered to be the liquidation value of a business even though that is not always the case.
Nissan currently trades at only 89% of book value in an industry where the average price to book valuation is 157%. Now, this one number doesn’t mean anyone should expect Nissan to double in price anytime soon; it does give us a solid indication that the stock is undervalued and deserves a much closer look.
The consensus of the analysts covering Nissan is for the company to grow its earnings by 16.2%/year for the next five years; yet the business is currently selling for a multiple of only 10 times projected earnings for the fiscal year ending March 2015 and 8.44 times earnings for fiscal year 2016. The price to cash flow multiple is also very attractive at only 5.69 times free cash flow.
If Nissan simply does nothing more than maintain it current valuation against the basic measures outlined here and the analysts are correct about the forward growth rate for earnings, investors who open positions at today’s price level can look forward to 16% annual gains for the next 5 years. If the price to book value of the business were to rise to a very conservative 1.1, today’s buyers will receive an additional 23.5% kicker on top of the price increases driven by earnings growth.
Final Thoughts And Conclusions
I am still surprised that a large, well known business that I drive past twice a day and watched the construction of their North American headquarters has managed to escape my review for all this time but, as with most opportunities, timing might not be everything, but it is certainly a significant component of the total. The timing is right today for Nissan and we have three potential paths to exceptional gains.
The valuation metrics can remain stable and investors can collect long term gains over the years to come while the earnings grow at an exceptional rate being projected by the analysts covering the stock. This would produce annual gains of 16%/year over the next 5 years.
The second potential path to profits would be for the stock to rise in relation to its book value. Considering the industry average price to book value is 157%, anticipating Nissan to trade at 1.1 times book would still represent more than a 25% discount to the industry but still reward investors with a return of 23.5% from today’s price. Even if it takes two years for this to materialize, it still represents better than a 10% annualized return.
The third, and what I believe to be the most likely, result will be a combination of the first two potential outcomes. I believe earnings growth will drive the stock price higher for the next several years and the price to book value will gradually rise to a level of 110% to 120%.
Investors who buy Nissan today are getting a business projected to grow much faster than the industry average but purchasing it at a serious discount to the overall industry. Investors today have three ways to drive to the bank with the profits to come from buying shares of Nissan.
