Warren Buffett’s Berkshire Hathaway recently took a stake in Itochu, which is a Japanese trading company. This week, I fundamentally analyze Itochu’s stock. I review Itochu’s key ratios, derive the intrinsic value using Discounted Cash Flow (DCF) analysis, and look at expected rate of return from this investment.
In the recent months, the US stock market is reaching all time highs, and better value investment opportunities are likely to be found in international markets. Itochu, traded on the Japanese market, seems to provide the margin of safety and growth prospect that value investors seek. Hope you all find this 15.50 minute video blog interesting. Since this is a long video, please feel free to use the time stamps in the video if you only wish to watch certain topics.
I review various key ratios such as Revenue, Net Income, Shares outstanding, Dividends, Payout Ratio, Free Cash Flows (FCF), Financial Leverage, Current Ratio, Debt to Equity Ratio, Return on Equity (ROE), etc.
After taking into account the current free cash flow of ¥678,606 million figure, a 3% growth rate of FCF (growth for the next 10 years), 10% discount rate, 2% long term growth rate (growth from 10 year mark to perpetuity), 1,490 million shares outstanding, and ¥2,192,557 million of long term debt, the DCF analysis yields us an intrinsic value of ¥4575 per share, which is equivalent to about $43.50. Using the current stock price of about $25.52 per share, and taking into the shares outstanding and future projects of free cash flows, we get the expected rate of return of 18.9%.
0:18 Business Segments
2:48 Key Ratios Analysis
10:57 Discounted Cash Flow Analysis / Intrinsic Value
12:45 Expected Rate of Return Calculation
13:57 Summary / Conclusion
10K Annual Report: here
Morningstar Key Ratios Link: here.
Useful Resources here.
Company overview: Itochu Corporation (伊藤忠商事株式会社) is a Japanese corporation based in Umeda, Kita-ku, Osaka and Aoyama, Minato, Tokyo. Itochu is one of the largest Japanese sogo shosha.
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