Shimano Stock Looks Interesting on Net Debt Valuation

Shimano is one of the best bicycle companies in the world. The balance sheet is pristine

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Feb 26, 2018
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Japan-based Shimano Inc. (

TSE:7309, Financial) (SHMDF, Financial) (SMNNY, Financial) is one of the best bicycle parts manufacturers in the world. Until recently, revenues were growing rapidly. Taking out nebt debt, the stock looks interesting.

The stock trades for 15,730 yen ($147.08), there are 92.72 million shares and the market cap is 1.46 trillion yen ($13.6 billion). It takes 107 yen to buy one dollar. The dividend is 155 yen and the dividend yield is about 1%. Earnings per share were 414.69 yen and the price-earnings ratio is 38.

Sales were 335.8 billion yen ($3.14 billion). Operating income is an impressive 19.2%. Return on equity was 9.4%. Last year, it was 13.4%. Pretty profitable. Management estimates the company will earn 509.15 yen in fiscal 2018. If it does, the company trades at a price-earnings ratio of 31.

Like many Japanese companies, Shimano’s balance sheet is ridiculously strong. Cash and investments are $2.254 billion and receivables $331 million. The liabilities side shows $121 million in payables and a paltry $79 million in debt. Free cash flow was $323 million and the free cash flow yield was 2.375%.

Shimano mainly manufactures bicycle parts and fishing gear. Bicycle parts account for about 80% of sales and fishing 20%. It makes the parts you would think of on a bike: pedals, brakes, handles, wheels, sprockets, etc. These parts go on road bikes, mountain bikes, BMX and anything you could think of.

The company boasts of the “world’s smartest bicycle," called Di2 integration. It is a smart app that connects to your phone and let’s a program know what is happening. In addition to parts, Shimano makes footwear, apparel, bags and sunglasses. Cannondale Factory Racing recently switched to Shimano for the first time. When the company says first time, I do not know if it is just this division or all of Cannondale.

The fishing division makes everything from soup to nuts, or sharks to bass if you prefer, in fishing equipment: rods, reels, lures, gear, etc. You can salmon fish, deep sea, surf, freshwater and probably any other type of fishing you can think of.

2017 was not a great year. Although sales were up 4%, net income was down 24.6%. In a report, management discusses Europe recovering and hurricanes in the U.S. I think that’s kind of vague. It will be interesting to see how the strong yen affects sales. Not too long ago, it took 120 yen to buy a dollar. Now, 107.

I wrote about Shimano back in October 2015. I noted how revenues doubled over 10 years and the stock may be interesting for a growth investor. Things did not turn out that way. The stock is down about 20% since then. Sales got waylaid back in 2016. Revenues fell from 378.6 billion yen to 323 billion yen in 2016. Management blamed bad weather in Europe, high bicycle inventories in the U.S. and lousy emerging market economies.

An article from Inc. discusses why biking is so popular. It states among the reasons: urbanization, newer amenities such as bike lanes, it is fashionable and health. Of course, retailers are facing competition from Amazon like everyone else. I searched “Shimano” on Amazon and everything that you could dream of is there.

I have never bought shares, but it is extremely thinly traded in the U.S. You would have to have your broker buy in Japan.

Bikes are part of the global economy. As the global economy goes, so goes Shimano. If you back out the net cash of about $2.2 billion, you can reduce the market cap to $11.4 billion for a valuation purpose. Then, these valuation numbers look pretty decent. I like Shimano, though I do not think I will buy shares. For a company with a market cap of $13.6 billion, you would think it would get more coverage in the U.S., but it does not.

Disclosure: We do not own shares.

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