[Stock-Analysis] Shimano: The Uncrowned King of Bicycles
Shimano is the world's largest cycling component manufacturer with an estimated market share of 70%!
Disclaimer: The information in this article represents my opinions and should not be construed as individualized investment advice, and are subject to change.
If you go out right now and take a look at your bicylce, I bet that you’ll find Shimano’s logo on either the gears, handlebars or pedals! In fact, Shimano is the biggest company in the bicycle industry.
Established in 1921 in Sakai City in Japan, Shimano is the global market leader in cycling components with an estimated 70% share in the mid to high-end market. The largest geographic market is Europe making up approximately 40% of total sales.
Shimano is also active in manufacturing fishing equipment such as rods and reels, and rowing equipment. It has 13,000 employees and its president, Taizo Shimano, is a member of the founding family.
Manufacturing is based in Japan, China, Singapore, Malaysia, and the Philippines. its single largest customer in 2021 was Germany's bike parts specialists Paul Lange & Co. Other customers include Taiwan's Merida Industry (9914.TW) and Giant Manufacturing (9921.TW). Key peers are SRAM of the US, Campagnolo of Italy, Yamaha Motor (OTCPK:YAMHF), and Bridgestone (OTCPK:BRDCY).
Konichi-Value Score
🤩 = Perfect
🙂 = Good
😑 = Acceptable
😖 = Bad
Table of Content
Profitability
Opportunities and Risks
Financial Soundness
Stock Price
Dividends
1. Profitability
First an foremost, Shimano was definitely an unlikely winner of the Covid-19 pandemic, with a very strong performance in 2020-2021, driven by demand for outdoor activity products and the following easing of restrictions. Although the company experienced some supply chain issues, it expanded its manufacturing capacity in Singapore and at two Japanese factories. The shares peaked in September 2021 and have corrected 38% since then.
The company is relatively dependant on a few customers and its single largest customer in 2021 was Germany's bike parts specialists Paul Lange & Co. Other customers include Taiwan's Merida Industry (9914.TW) and Giant Manufacturing (9921.TW). Key peers are SRAM of the US, Campagnolo of Italy, Yamaha Motor, and Bridgestone.
Overall, the company has performed very well over the past year and its stronghold on the bicyle market wordwide has helped it ride (pun intended) the increased interest in cycling during and after the pandemic.
With an average operating profit margin of around 21-27% that has not been particularly hampered by the supply chain shocks, Shimano has shown to not only be incredibly profitable, but also incredibly resiliant to outside shocks.
One the negative side, Shimano’s other businesses, mainly fishing equipment, is not keeping up with its cycling components divisioin. This means that the company is very reliant on the cycling market which might not deliver the same growth YoY due to the Covid-19 restrictions easing further.
2. Opportunities and Risks
Despite what appears to be a stable long-term outlook for this global market leader of bicycle components, the short-term might be less rosy for Shimano.
The global bicycle market is expected to grow around 3-4% YoY in the medium-term, driven by a multitude of factors such as demand for cleaner transport, a shift away from congested public transit, promotion of health and exercise, and an uptick in more outdoor leisure activity, but there is no major new market-space for bicycles.
In essence, the market pie is not expected to grow that significantly, although there are pockets where growth is anticipated to be higher (in China for example). On top of that, a lot of demand migh have been moved forward due to Covid-19, and might affect demand negatively short-term. With current global consumer spending patterns not in a healthy state, trading conditions will likely not improve as the year progresses. This line of thinking appears to be reflected in consensus estimates which are below company guidance for the current financial year (JPY151.86 million consensus operating profit versus JPY161 billion guidance). Although this is not a wide margin (about 6% lower), it highlights the sense of direction for earnings in the short term:
However, what makes Shimano an attractive business anyways is its 50-year track-record as the dominant market leader, its strong brand, and the environmental credentials of its products and specialized skills at an economy of scale makes it unlikely that we’ll see them lose market share.
As a major risk factor even in the long-term, there is likely limited scope for Shimano to expand into the electric motor vehicle market. e-Scooters and similar modes of transport do not usually need gears, and EVs parts are dominated by conventional auto parts manufacturers.
However, Shimano has its e-bike components although it is currently not a major part of their business.
Looking at its historical earnings and current market-trends, I believe investors can look forward to a relatively stable earnings outlook with Shimano, delivering high operating margins and generating stable free cash flow. The key questions therefore appear to be more to do with the outlook in the short term and valuations.
Market cooling post-pandemic
After a strong performance 2021, it may come as no surprise that Shimano talked about cooling conditions in Q1 2022 results. It would appear that the levels of demand seen last year are unsustainable. There are also new headwinds to contend with, such as falling consumer sentiment in Europe due to the war in Ukraine and consumer discretionary spending under pressure with high inflation. Shimano has commented that high-end product demand remained high, whilst demand seems to cool down most in Asia (including Japan) and Central and South America.
3. Financial soundness
Just looking at this chart should tell you enough: Shimano will likely not go out of business even IF THE WORLD EXPLODES. In all my years, I have never seen a liquidity ratio being this strong.
It’s sad to see that Shimano does not have a stronger record of acqusitions, because with the amout of free cash the company is sitting on, they could literary buy up every competitor in the industry!
4. Stock-price
With the shares visibly correcting since autumn 2021, a lot of the current negatives are priced into the stock. The shares are not as hyped as they were a year ago, although there are uncertainties over rising input costs with a strong dollar.
Regarding stock-price valuation, on current consensus estimates the shares are trading on P/E ratio of their own esitmations in 2022 is at 18.1x and a free cash-flow (FCF) yield of 6.0%. For a dominant and profitable global market leader, valuations are decent but not especially undervalued. All in all, it’s a justified valuation for a company with such a strong moat, but considering it acts in a relatively mature market, it's safe to assume that we’ll likely won’t see any major shifts in revenues or profit margins.
However, the P/E is at historical lows which indicate that further uptick revenue could hype-up the company to new heights easily:
5. Dividend
The dividend yield of 0.97% is not particularly high with a limited payout ratio, which is disappointing considering the large net cash pile of 360 billion yen. For a company that sits on this amount of of cash, has no major acqusition strategy, and still only pays out 22.6% of its free cash-flow (FCF) in dividend, I say it’s pretty bad.
Also, historically, share buybacks have not been a consistent element of Shimano's shareholder returns policy.
Conclusion
There is no doubt that Shimano is a high-quality company with a solid market position and a sustainable long-term growth strategy. However, I do not believe the shares are undervalued sufficiently to invest in. The shares have corrected but perhaps valuations were previously too excessive with unrealistic expectations. As this stock gives relatively stable performance long-term, and this is a value investing newsletter, I would prefer to invest in the stock if it was valued around a P/E ratio of 15x or lower.
Hence, I rate the stock as a HOLD.
Konichi-Value Score is very easy to understand.