Roundabout
Subaru (OTCPK:FUJHF) (OTCPK:FUJHY) is drastically undervalued at a price-to-earnings ratio of 5.29 per share (annual), with 2025 guidance unchanged. The Japanese automaker sector is undervalued due to a persistently weak The yen allows Japanese companies to either undercut global competitors and thereby achieve higher sales or, on balance, to benefit from the devaluation of the yen that we have seen in the yen in recent years.
In terms of the balance sheet, Subaru is financially strong. The company has a liquidity ratio of 2.40, which is considered healthy. The liquidity ratio measures a company’s current assets compared to its current liabilities such as current debt, accrued business expenses, and accounts payable. Current assets include cash and cash equivalents, inventory expected to be sold within a year, and accounts receivable. A ratio of 2.0 means that the company currently has twice the assets it currently has. to cover its short-term liabilities.
Subaru has a very strong cash balance of $11.9 billion, which is exceptional relative to its market capitalization of $13.6 billion. Subaru has liabilities of $14.3 billion, including long-term debt, which is a very modest number, especially relative to cash. Many companies have a much higher ratio of total liabilities to cash and current assets than a single handle on this number, including Subaru, which is at 1.20.
Subaru has grown revenue and EBITDA year-on-year at a great rate of 17.16% and 24.27%, respectively, well above the automaker industry average of 2.09% and 1.46%, respectively. Looking at the three-year history, the numbers are even better: revenue has grown 18.45% and EBITDA 30.73% annually since 2021. Subaru’s dividend yield is a solid 3.73%.
In terms of valuations, as mentioned at the beginning, the company trades at just 5.29 times earnings, which is well below the industry average of about 17.00. Subaru’s price-to-book ratio is 0.82 versus an industry average of 2.14, suggesting the stock is trading at a discount compared to peers. Finally, I would like to reiterate that the cash position is a very strong sign that the dividend is most likely safe. It is not often that a company’s cash position comes anywhere close to its market cap. Famous hedge fund manager David Tepper once said, “It’s nice when you can buy cash (almost) cheaper than cash.” Although he was referring to bondholders’ claim to assets in the special distressed debt situation, the point remains.
From a macroeconomic perspective, the Bank of Japan’s failed attempt to raise the Japanese deposit rate shows that the market is in control. A continued dovish policy by the Bank of Japan, leading to persistently low interest rates and supporting Japanese stock indices, should provide further tailwind for Subaru’s share price.
Subaru has a strong presence in the United States. Sales in the United States account for 71% of the company’s total revenue. 92% of Subaru’s overseas revenue was generated in the United States. This avoidance of China and generally developing countries is an important factor in the sustainability of Subaru’s sales, revenue and profits.
In my view, the U.S. economy remains the strongest house in the global economic neighborhood. Today’s retail sales came in at 1.0% versus expectations of 0.3% and were the highest since January 2023. This came as expectations of a decline in nominal GDP growth and the U.S. labor market increased. Bond yields have made a major reversal, rising 10 basis points, almost reversing last week’s decline.
China also released a variety of economic data, and much of it was, as expected, gloomy. Chinese home prices accelerated their decline to 4.9% in July from a year earlier, down 4.5% in June. Industrial production continued to outpace retail sales, showing that the long-awaited rebalancing of the Chinese economy through consumption is not going as planned. Investment in fixed assets continued to decline and the unemployment rate rose 0.2%.
In Europe, economic growth is much slower than in the United States. Germany has narrowly avoided recession, although German GDP has contracted in four of the last eight quarters, without two consecutive quarters of contraction.
Fortunately for Subaru shareholders, unlike some German car exporters, the company has little exposure to China or low-income developing countries in general or the recession-hit European economy and generates most of its sales in the United States.
I expect prolonged weakness in the yen to boost Subaru’s global export competitiveness and overseas earnings. The Bank of Japan is the world’s most dovish central bank and will closely monitor any yen appreciation and deteriorating risk sentiment, as yen depreciation and positive Japanese equity prices are closely linked to the return of the consumer price index to target in Japan. We saw a bit of this when the market rejected the Bank of Japan’s recent rate hike, sending the Nikkei index into a 12% free fall overnight.
Bank of Japan Governor Uchida Shinichi said:
Japan’s economy is not in a situation where the bank could be left behind if it does not raise the policy rate at a certain pace. Therefore, the bank will not raise its policy rate when financial and capital markets are unstable.
The risk for Subaru is not whether the yen moves between 140.00 and 160.00 against the dollar. The risk is whether USD/JPY moves to 120.00 or below. While the Bank of Japan has raised interest rates from -0.10% to 0.25%, that is nothing compared to the Federal Reserve’s tightening campaign. The current benchmark interest rate is 5.25% to 5.50% and is likely to remain above 3% for the next 12 months, even if an aggressive Fed easing campaign is priced in.
The Bank of Japan effectively took away a few basis points of carry that day, in terms of the yield differential of about 300 basis points. The US Treasury yield premium is still very high. There is a lot of extrapolation in the market mindset that the Fed will return to 3% Fed Funds and raise Japan to 3%, thereby closing the relative US Treasury yield premium over the Japanese Treasury yield and strengthening the yen. My point is that if the slowdown in the US economy forces the Fed to return to 3% Fed Funds in a year, the likelihood of an inflation problem in Japan big enough to justify a 3% Bank of Japan policy rate is minimal.
Subaru’s last upward move in share price was from 2011 to 2015 and coincided with dovish monetary policy from the Bank of Japan, a weak yen and strong USD, and falling raw material and input costs. If the global economy and financial markets hit some kind of air pocket or growth slows, you can count on the Bank of Japan to respond in a dovish manner. In that sense, Subaru is a great risk-off defensive investment.
In summary, Subaru’s share price simply does not reflect its strong financial position, earnings power and macroeconomic tailwinds. Markets appear to be either overlooking or pricing in an unlikely worst-case scenario for Subaru. With that in mind, I give the company a Buy rating.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these securities.
