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Horiba, though not a water bet, is an interesting company [ClearOnMoney]
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Horiba, though not a water bet, is an interesting company

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Commentary

Horiba, though not a water bet, is an interesting company

27 Jan 2013 by Jim Fickett.

I mentioned earlier that Horiba, a Japanese measurement instruments company, might be a way to invest in water quality monitoring (Limited choices to invest in water monitoring equipment). However it turns out that Horiba's “Process and environmental” division, which includes water supply quality monitoring, provides only 12% of sales. Water quality and analysis is only 28% of that, or 3% of sales. And even then, some of this is laboratory/manufacturing water quality, not environmental water quality. Furthermore, the current strategic plan is focused on expanding the medical equipment division:

The left bar of each pair is 2011 operating income, and the right bar is the projection of the same for 2015 (graph from the 2011 annual report).

So Horiba is not much of a water bet. However it is quite an interesting company. The company is old (founded in the 40's) and stable (the last 8 annual reports describe an overall strategy that changes little). They have grown significantly (from operating income around 2 to 3 billion yen in the 1980s to about 10 to 15 billion recently). They have done a number of acquisitions, but these have been highly targeted to expand globally in a very directed manner, and most growth has been organic. They have slowly but steadily increased the fraction of non-Japanese employees, and are now a truly international company. They try to do just a few things, but do them really well, and own a large fraction of the market for each specialty. For example in their automotive division, most sales are for testing emissions. When they do expand their product line, they do it in a very directed way, making use of existing expertise and markets where they are already dominant.

The company is profitable and is growing shareholder value over time:

The dashed lines show the average values for free cash flow and net income. Because the available free cash flow data begin in 2003, average net income is shown for both 2002-2011 and 2003-2011.

Horiba is currently a bit on the expensive side. It would appear from the above graph that sustainable profit (either free cash flow for cash flow accounting or net income for accrual accounting) is in the neighborhood of 5 billion yen per year. The market cap is currently 111 billion yen. That gives a p/e of about 22. This may not be unreasonable for a growing company, but it is on the high side.

In considering an investment in any Japanese company, one must take into account that Japan has the developed world's worst debt load, and that the central bank is being pushed to monetize the deficit. So high inflation, and perhaps even hyperinflation, is a serious danger. For this reason I would not want to own stock in a Japanese company that was mostly in the home market. However 60% of Horiba's sales are outside of Japan, and they have major organizational centers in Europe and the US. If the Japanese economy were to become largely dysfunctional for a few years, Horiba would be badly hurt, but would bounce back.