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CUNDILL INVESTMENT CONFERENCE
PETER CUNDILL, SETH KLARMAN ET AL.
(continued from preceding page)
"At the Industrial Bank of Japan, we owned 4-5% of every publicly quoted Japanese company. And in 20 years at the Industrial Bank of Japan, I never heard the concept of shareholders' rights dealt with - ever!"
Well, that's changing - so I don't think he'd make that same comment today.
PRICES, BALANCE SHEETS & CASH FLOW.
Relative to earnings, Japan is still expensive. But assets....
Cundill: It's interesting how we're all products of our experience to one degree or another. One of living legend Sir John Templeton's early coups was to invest in Japan when almost no one else was doing so. And in fact, he even bought puts on the Nikkei and made money on them in 1989 around the same time that we did.
However, I suspect it's been hard for the Templeton Group to go back into Japan. In part, because of Templeton's cultural influence, they focus more on P/E multiples, (although they seem to be changing). And relative to reported earnings, Japanese stocks remain very expensive. But on the basis of their asset values, Japanese stocks are really cheap.
You wanna buy near the lows? Consider Japan today.
Cundill: One of Ben Graham's tests was to buy securities at their lows - ideally near their all-time lows, but certainly near their five-year lows. And in Japan, plenty of securities meet that test today including the one we're using as today's case study. Tokyo Style's five-year low - which it reached earlier in 1997 - was ¥1,150. At ¥1,290, it's not trading that much above it. And its lifetime high - which it reached in 1990 - was ¥3,040.
In some ways, Japan today is better than the U.S. in 1975.
Cundill: But the difference in these companies, as I mentioned earlier, is that on a balance sheet basis, they are better in many respects than American companies in 1975. Why? First, many of them have lots of cash and marketable securities. Second, they tend not to have a lot of inventories and receivables. And third, they tend to have no long-term debt - and, in some cases, almost no short-term debt.
For example, Tokyo Style has "Cash and Securities" of ¥123 billion and "Investments and Others" of ¥15 billion. So those two items total ¥138 billion - or ¥1,367 per share - which is more than the current price of the share. You couldn't find many of those in the U.S. today. Actually, you wouldn't even find many of those in the U.S. back in 1975. Tokyo Style is very cheap.
Also, it has long-term debt of only about ¥166 million. So it has virtually no long-term debt [- something less than ¥1.6 per share].
Many of these companies are generating lots of cash.
Cundill: In addition, we look at cash flow. And there, we note that Tokyo Style has gross cash flow of more than ¥5.5 billion. By comparison, its capital expenditures are less than ¥550 million. Therefore, only about 10% of the cash flow that Tokyo Style is generating is required for its capital expenditures. So they can do all sorts of things with the rest. They're generating a lot of cash....
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