NTN: It’s a bull market, baby just say yes

by SR on February 1, 2013

NTN 6472 quarterly operating profit margin (%)

On 31 January 2013 NTN announced pretty poor results for the October-December 2012 quarter (Q3) of the March 2013 financial year. As the chart above shows, the company posted a loss at the operating level in Q3. What is more worrying is that in 2010 the company did make a small profit at a similar level of revenues, which implies that now either costs are not being controlled or pricing is biting (see chart below – click on any image on this page for a larger picture).

NTN quarterly sales and operating profit in billions of yen

And management guidance (which is unchanged) implies that the company needs to somehow get 6 billion yen in operating profit in Q4 to hit guidance, which they won’t, so they’re almost certain to miss full-year forecasts.

NTN's annual sales and operating profit in billions of yen, including latest guidance

Furthermore, at a macro level industry-wide orders for bearings – the company’s main business – in Japan are still very weak, with a book-to-bill ratio of an appalling 0.92x (see below).

Japan bearing ratio of orders (bookings) to sales (billings) by month

And the order backlog for the Japanese bearings industry is back to levels not seen since early 2004. So sales probably get worse before getting better.

Japan bearing industry monthly order backlog in billions of yen

But you know what? This doesn’t matter. At one point NTN’s stock was up more than 6.4% in morning trade in Tokyo. This is what a bull market looks like. And that’s OK. You can’t wait for stocks like this to post solid margins and improving fundamentals. It’s a cyclical, so you buy before it looks good and hope that you get the directional call right. It should not surprise you that NTN, JTEKT and NSK are among the very best performers in the auto parts space since the current rally started in mid-November 2012 (see chart below).

Performance of Japan auto parts and related stocks from November 2012 market low

These companies have struggled the most not because of their auto parts businesses but because of their exposure to machinery and to European demand. When the market looks like turning the bolder investor buys the stocks that have suffered mightily on the basis that these are the ones with the most upside. (Auto lock supplier U-Shin has also rocketed, basically because its largest customer is Mazda and the weakening yen versus the Euro has a significant positive impact on that OEM.)

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