Japanese electronics giant Panasonic makes 3D TVs, Blu-Ray recorders, digital cameras, and energy-efficient devices. It also knocks out more traditional washing machines, vacuum cleaners, microwaves and refrigerators. It’s excellent at inventing, miniaturising, simplifying and driving down the cost of technology. So here’s why I think the shares have been unfairly sold-off after a couple of poor years.
Something of a corporate tipping point has been reached – out has gone the philosophy of decision-making by consensus and in has come a more agile organisational structure. Layers of overheads have been stripped out and product development times are now shorter. As a result, Panasonic returned to the black in the last quarter after two years of losses.
What’s more, on 29 July, the firm announced the ¥818.4bn ($9.4bn at $:¥ of 86) acquisition of the minority stakes in Sanyo and Panasonic Electric Works (leaders in rechargeable batteries, solar cells and environmental products) that it doesn’t already own. This is a very astute move that takes advantage of depressed ratings, creates compelling synergies and shifts the group further towards its aim of being the number-one green innovation company in the electronics industry.
Panasonic (NYSE: PC), rated a BUY by Deutsche Bank
For the 12 months ending March 2011 the board forecasts turnover and operating profit margins of ¥8.9trn (or $103bn) and 3.5% respectively, rising to ¥10trn (or $115bn) and 5% by 2012. Based on this, I would rate the stock on a ten-times earnings before interest, tax and amortisation (EBITA) multiple. After deducting the proforma net debt of ¥565bn ($6.6bn) and discounting back at 12%, that delivers an intrinsic value of about ¥1,750/share (or $20.30).
The main risks include another economic slump, cut-throat competition from the likes of Samsung, continued yen strength (which is crimping exports) and difficulties hitting the targeted savings. That said, with a first-class brand, I can see Panasonic benefiting from the move towards more households going digital, its proximity to China, and cash-strapped families spending more time entertaining themselves indoors. Deutsche Bank have a price target of ¥1,500 ($17.40).
Recommendation: BUY at $13.40
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments