BeritK/iStock via Getty Images We began coverage of Horiba (OTCPK:HRIBF) at the start of the year, and shares quickly gained almost 50%. With the market dislocation in the Japanese market (EWJ) following a more hawkish Bank of Japan (BOJ) than expected, many Japanese shares experienced meaningful declines. While the iShares MSCI Japan ETF and the S&P 500 Index (SPY) have basically recovered from the early August crash, some smaller companies like Horiba are still trading at significantly lower prices than prior to the mini-crash. Data by YCharts For Horiba, it is better to look at shares traded in Japan, as there is very little liquidity in the OTC market. As can be seen in the graph below, Horiba shares trading in Japan have experienced a small recovery but are still trading significantly below previous highs reached in the year, and even below where they started 2024. While part of the decline is justified given the fact that a stronger Japanese Yen (FXY) tends to hurt Horiba’s profitability, we think the market significantly overreacted with the price correction. Morningstar As a reminder, Horiba has several different business segments offering analytical and measurement equipment. These include automotive test systems, which is the largest segment, and it also offers scientific measurement devices such as pH meters, X-ray microscopes, and spectrometers. For the semiconductor industry it offers devices such as mass flow controllers, in the medical segment it sells blood testing instruments, and in the environmental segment it offers devices to test air and water quality. Horiba reinvests a meaningful amount of its revenue into research and development to keep its offering fresh, with R&D expenses as a percentage of sales of around 7% in 2023 increasing to roughly 7.7% in 2024. Horiba is also spending to expand its production and development capacity, notably investing in a new Technology Center and a new factory in Kyoto. First Half of 2024 Results Horiba’s first half of 2024 results were a mixed bag, with sales reaching a new record high, but the operating margin experiencing a small decline. The lower profit margin was due to weakness in most business segments, with the exception of the semiconductor business which generated most of the profits during the period. Net income attributable to Horiba shareholders experienced a very significant decline, but this was mostly due to reporting gains from the sale of shares in some subsidiaries the previous year. Ordinary operating profit actually increased by approximately 6% compared to the first half of 2023. Horiba Investor Presentation Industry Dynamics One of the things we like about the industry in which Horiba operates is that competition is more focused on equipment performance and functionality, and less so on price. Most of the devices are also relatively complex to operate, and they usually have to adapted to a process which might even have to be certified. All this adds to significant switching costs for customers, allowing the company to earn higher profit margins and returns on capital. What is important in this industry is also to innovate and respond quickly to customer demand changes, which Horiba appears to be doing well. For example, it is adapting to the “Make in India” initiative by building some devices locally. It is also developing specific devices for the global pharmaceutical industry, which aim to meet the demand for fast microbiological testing that improves productivity. Horiba Investor Presentation Another business segment where innovation is crucial is semiconductor equipment, where requirements tend to get more stringent as technology gets more sophisticated. With chip sizes shrinking even small particles can contaminate and damage wafers, and testing and inspecting them is also getting more challenging. Horiba is responding to the challenge with new products for their customers. Horiba Investor Presentation Financials Horiba has delivered good financial results over the past decade, with revenue growing almost 50%, and earnings per share more than doubling. This has been achieved, though, with a good amount of cyclicality. When companies are expanding and building new factories and labs they tend to buy considerably more testing and measuring equipment, and when the economy weakness they usually reduce their capital expenditures significantly. Despite having significant industry diversification, Horiba’s financials retain a good amount of cyclicality. Still, even during the weaker periods, the company has tended to remain profitable and has delivered a solid ~12% operating margin average over the past decade. Data by YCharts Horiba also has a very conservative balance sheet with significant cash and short-term investments, and only a moderate amount of debt. This gives the company optionality for acquisitions or to accelerate investments in the business. Data by YCharts Shareholder Returns Horiba has a variable dividend policy, which is very rare in the U.S., but more common in places like Europe and Japan. In Horiba’s case, the company targets a dividend of 30% of the previous year’s consolidated net income attributable to Horiba. If judged appropriate, the company will increase shareholder returns though special dividends and share buybacks. For this reason investors should understand that the dividend can vary from year to year, with the additional variability from the exchange rate. For example, Horiba paid 245 yen in dividends for fiscal year 2022, 290 yen for fiscal year 2023, and it is forecasting a lower dividend of 265 yen for 2024. The dividend is paid semiannually, with 80 yen for the interim payment, and 185 yen for the final dividend payment. This puts the forward dividend yield at approximately 2.8%. The company is also returning capital through buybacks, with Horiba repurchasing approximately ¥5 billion in the first quarter, a little over 1% of its market capitalization. The current dividend yield, both the forward yield and trailing twelve months are higher than then ten-year average. Data by YCharts Future Outlook Management kept its fiscal year 2024 forecast unchanged in August with respect to the previously shared guidance given in May. Guidance calls for a small decline in net income compared to the previous year, but an increase in ordinary profit. The company’s profitability is expected to continue being somewhat pressured by the exchange rate and a weakening global economy, but some sectors are showing increased strength, like the semiconductor business which is seeing growing demand thanks to investments in generative AI and data centers. Horiba Investor Presentation We see the expected operating profit margin of 16.2% as healthy, and ¥37 billion is a meaningful level of earnings considering the current market cap is roughly ¥407 billion. Longer-term we have some concerns about the automotive segment, as some of the current emissions measuring equipment will become obsolete once the world transitions to electric vehicles. We went into more detail about this risk in our previous article, but in summary the company is working on developing products for the EV market in preparation for the transition. Horiba Investor Presentation Valuation Based on the company’s guidance of ¥37 billion in net income attributable to Horiba’s shareholders and a market cap of approximately ¥407 billion, the forward Price/Earnings ratio is approximately 11x, which we view as very attractive for a company with healthy profit margins and a history of decent growth, even if it comes with some cyclicality. Spectris PLC (OTCPK:SEPJF) is a similar UK company in the advanced measurement and testing industry also trading at a relatively low EV/EBITDA multiple. U.S. companies in the industry tend to be significantly larger, and also trade with more expensive multiples. For example, Agilent (A) and Waters (WAT) are both trading with EV/EBITDA multiples above 20x, and Danaher (DHR) is currently trading above 30x. Data by YCharts Risks There are some risks worth keeping in mind with respect to Horiba. The biggest one we see is the risk to its car emissions measurement and testing business, which is the largest segment, as the world moves towards electric vehicles. This is mitigated by what is likely to be a long transition period that could take more than a decade, and by efforts the company is making in creating advanced solutions targeted at EVs. Another risk is that the company derives most of its revenue from Japan, which has experienced subpar economic growth for a long time. The country’s currency also creates some risks, with the company benefiting when the yen depreciates as it becomes more competitive in international markets, but with earnings and dividends reported in yen, a depreciating yen would translate into fewer U.S. dollars in dividends paid. Finally, the company is significantly affected by the industrial capex cycle, and this cyclicality can be seen in the company’s sales and earnings. Risks are mitigated by high profit margins and a very strong balance sheet. Data by YCharts Conclusion Horiba is experiencing some temporary weakness and its operating profit is expected to be slightly lower compared to last year. We see the company continue to invest in capacity expansion and research and development and believe the share price decline has made shares attractive for long-term investors. Trading with a forward price/earnings ratio of close to 11x, we believe the valuation to be attractive for long-term investors. While there are several risks for investors to consider, we see a positive risk/reward balance. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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