Yamaha Corporation: A lindy business at a reasonable price
Global category leader experiencing a cyclical downturn
Howdy folks,
Unfortunately I don’t currently have access to all the data I would like to complete this writeup, so I’m going to focus on keeping this concise:
Yamaha Corporation is the world’s largest musical instrument manufacturing company, as well as a leader in audio equipment. This is a business with cyclical risk as it suffers from a post-covid sales hangover; though timing a recovery is above my ability, I believe shares currently offer a compelling through-the-cycle valuation for patient investors at a market cap of $3.7bb.
As a margin of safety sanity check, I would like to pay less than 20x trough (trailing 10 years) operating income minus income tax expense for this business after netting out net cash, excess inventory, and long-term deferred taxes / pension benefits. Note that I am giving zero credit for $0.76bb in long-term investments, the bulk of which is publicly traded (namely Yamaha Motor, Audinate, and Toyota Motor). Here’s what that looks like:
Market cap of $3.7bb - $0.6bb in cash - $0.3b in excess inventory + $0.2bb in deferred taxes / pension benefits = $3.0bb
The trailing 12 months is actually the trough of operating income minus income tax expense at $225.5mm - $65.7mm = $159.8mm
The calculation works out to an 18.7x multiple
After establishing this margin of safety, my next concern — especially in Japan — is capital allocation. We have a lindy business / brand that’s making money, but is it being put to good use? Yamaha Corporation also passes here, in my view:
The general strategy is to return 50% of profits to shareholders while reinvesting the other 50% in R&D / M&A
They pay a modest forward dividend of 2.2% with an authorization to buy back up to 4.1% of shares through July, 2024 — the share count is down 12.8% since 2014
They’ve reduced their stake in Yamaha Motor in large chunks: by over half in 2021 and by over a third in 2007
Their stake in Audinate, though hardly material, has been a great investment
Thus far, we’ve established that we have the opportunity to buy a category leader with a reasonable capital allocation policy at a >5% long-term earnings yield with a 20% bonus in the long-term investments. Sounds good to me. My concern then flows to whether this business is somehow mired in a secular deterioration or if I am simply way too early in the cyclical downturn:
Too early / underestimating duration of cyclical downturn:
For about 4 years coming out of the GFC, the share price in Yen was stagnant. The balance sheet was much weaker at the time, but this does concern me. I could be not just early, but way too early.
China exposure:
China is a small percentage of audio equipment revenue and only 13.9% of the most recent quarter’s musical instrument revenue — already down over 25% from two years ago
Competition / brand deterioration
I did some sleuthing on Reddit. At least as far as pianos and guitars go, Yamaha is a terrific brand, and audio equipment sales grew over 10% y/y in North America, Europe, and Other Regions.
Global demographic downturn
Global population growth forecasts are fairly bleak, and with pianos having a 30 to 50 year lifespan this is a real concern
M&A = treading water
With revenue more or less flat over the last decade despite numerous acquisitions, well, that’s pretty concerning. That said, operating margins have improved substantially and the share count continues to get chipped away at.
Like any investment, there are risks and it’s up to you to judge how severe they are. Having established some of these risks, my personal take is that this is an extremely durable company worth, say, 15x through-the-cycle operating income minus income tax (using FY2014 to FY2023). That’s $369.5mm - $94.1mm = $275.4mm * 15 = $4.1bb. Giving 75% credit to cash on the balance sheet, 50% for excess inventory, and 50% for investments gets me to over $5bb — in other words, the equity is currently undervalued by around 35%.