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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (247)  | Author's Website |

Hoshizaki Growing by Being the Best in Refrigeration

Japanese company is arguably the best refrigerator manufacturer in the world

February 20, 2020 | About:

Hoshizaki Corp. (TSE:6465) is arguably the best refrigerator manufacturer in the world, and its financials prove it. The stock sold off two years ago on accounting irregularities, but has done well since then. Sales have been strong, there is no debt and profitability is high. 

The stock trades for 10,520 yen ($93.88), there are 72 million shares and the market cap is 757 billion yen ($6.9 billion). Earnings per share are 337 yen and the price-earnings ratio is 31. The dividend is 110 yen and the dividend yield is 1%.

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Sales grew from 265 billion yen in 2016 to 292 billion yen in 2018. That’s good growth! Earnings grew from 296 million yen to 355 million yen. Free cash flow is usually about 25 billion to 30 billion yen.

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The balance sheet is unbelievable. There is 218 billion yen in cash and 40 billion yen in receivables. This is to a paltry 19 billion yen in payables and zero debt. So when looking at valuations, you can subtract the 218 billion yen in cash from the market cap of 757 billion yen. This gives you a market cap of 539 billion yen. Based upon this valuation, the share price would only be 7,486 yen. So the price-earnings ratio would be 22 and the free cash flow yield would be 4.7%. This is cheap for a stock with this growth and no debt.

Hoshizaki is arguably the best refrigeration and ice equipment manufacturer in the world. The Japanese company got its start in the 1940s and has grown leaps and bounds. Approximately 26.2% of sales come from refrigerators, 17.4% from ice machines, 7.3% from dishwashers, 9.8% from coffee and other dispensers, 16.9% from maintenance and the rest is from other equipment and sales.

In the U.S., Hoshizaki is best known for its ice machines. Having owned a restaurant (and been the landlord to three), I can tell you that they have a good reputation. A friend of mine who has worked on them considers them top quality and says that their parts are well machined. In the restaurant business, it’s often customary to rent your ice machines and dishwashers. That way, the company that rents it to you is responsible for cleaning and maintenance. As mentioned previously, Hoshizaki gets 16.9% of its sales from maintenance.

I found quite a bit about Hoshizaki on the internet, but of course all ice machine manufacturers claim they are the best. That's natural in any industry. It's what's said inside of the restaurant and food industry that counts. The company is highly respected.

I wrote about the stock last June when it was trading around 7,950 yen. Since then, it has appreciated 32%. We bought the stock when several divisions got caught fudging numbers.

Hoshizaki is becoming known for its ice machines at high-end bars. An article from Catering Insight quotes an owner of a distillery: “Ice is a crucial part of a drink. We wouldn’t serve an espresso martini with substandard coffee, so we’re not going to serve a cocktail without the right ice. Our highly trained bartenders create show stopping cocktails using our vodka and the perfect Hoshizaki ice to finish them off.” In the previous article I wrote, we found that Jim Beam was using Hoshizaki in its Tennessee distilleries. The Foodservice Equipment Journal reported the company is phasing out HFC refrigerants from its ice machines to be more environmentally friendly.

In 2019, sales were down slightly by 0.9%. Sales were weaker in Japan, its main market, due to fewer dishwashers being sold and problems from accounting fraud. Morningstar thinks the Summer Olympics will drive sales by 5% in Japan this year. They have a fair value of 9,900 yen, which I think is stingy. The analysts also note that sales were 233 billion yen in 2014 and that return on equity is 10.4%. Great growth and very profitable. I think the fair value should be higher based on the fact that past growth has been strong and it looks like it's going to keep growing. The growth is predicated upon Hoshizaki being the leader in the industry. I don't see other refrigeration manufacturers catching up.

The stock has been almost a 10-bagger in 10 years. It’s all-time high was two years ago at 11,860 yen. Of course, it took a dive when a couple of divisions got caught pumping up sales numbers. The stock dropped to 6,680 yen in December 2018.

Morgan Stanley is not a fan. The analysts set a a target price of 7,900 yen. In a note, they said, “We see risks of a slowdown in capital investments by the domestic restaurant industry and a potential negative impact on marketing activities from improvement measures to the sales system in the wake of improper dealing.” Of course, they were bearish and the stock has done well.

One of the risks is that the company could continue to have shady accounting issues. That could cause a nasty surprise. Another is the Japanese financial markets. They are notoriously rocky. And as for the yen, who knows?

I like Hoshizaki and am going to hold. Growth has been awesome, there is no debt and the company is the best at what it does. Plus, owning a Japanese company adds to diversification. Who knows when the American markets are going to correct.

Disclosure: We own shares. 

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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