So far this year, one pundit’s pitch for the “top technology stock of 2015” has worked out well (that was Navellier’s tout of MEI back in January) — so perhaps that inspired a few readers to send a different pundit’s take on the same prognostication my way.
Jim Pearce is pitching Investing Daily’s newish Smart Tech Investor newsletter, which appears to be helmed by Leo Boeckl and to be focused both on identifying long-term tech trends and on buying income stocks in the “old tech” universe who can still benefit from those trends. Their masthead says they’re getting growth and income from the “utility stocks of the future.”
But it’s not the big picture or the long term they’re selling today — today they’re pitching windfall profits for their “$1 Tech Stock for the Next Twelve Months”… here’s a taste of the ad:
“Forget Google, Amazon and Facebook!
“Here’s the Most Likely Tech Stock to Earn You Windfall Profits in 2015….
“If I told you that my pick for the biggest tech stock winner of 2015 wasn’t one of the ‘FANG’ stocks (Facebook, Amazon, Netflix, Google), you might raise an eyebrow.
“And if I told you it didn’t sell a whiz-bang piece of personal tech that you can wear, download or drive… it wasn’t a new cloud, big data or social media play… in fact, it can’t claim a single breakthrough innovation—well, I imagine you’d be just a bit skeptical.”
OK, so being skeptical is always good… but if their stock for the year isn’t a “hot topic” idea, what is it?
“Why My #1 Stock for the Next 12 Months Is So Intriguing
“This company isn’t a big name. (Its market cap is under $8 billion.)Are you getting our free Daily Update
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“Only one analyst on Wall Street is covering it. (And he rates it a “hold.”)
“It’s not a new startup. (It was founded in 1936!)
“And perhaps most disappointing of all, it’s not the lead dog in a cutting-edge area.
“In fact, it’s what you might call ‘old tech.’
“So why am I so excited about this company?
“Because the last time I called out a stock with similar potential, all it did was….
“Jump 50% in Just 8 Months”
Hopefully the spurious logic jumps right out at you there (I’m excited about this one, because the last time I was excited about a stock it went up by 50% — that’s the kind of decisionmaking that sinks individual investors), but we’ll move past that so we can figure out what the stock is with a minimum of snarkiness.
That “last time,” by the way, was Western Digital (WD), which they said was the last stock “like this” that was “uncovered by our system.” And they take credit for profitable calls on EMC, Seagate Technology, Lenovo, and a short on 3D Systems, so there’s certainly some indication of a fondness for “old tech” hardware companies in that brief and selective history.
So how about a few clues about their favorite idea for 2015?
“Our number one company is a global powerhouse in selling technology to businesses with operations in over 200 countries, including all the fastest-growing emerging economies….
“No less than 57% of their sales come from outside their home country.
“Even better, 2 of their 4 regional headquarters are in Japan and Singapore, so you know they’re focused on the exploding Asian opportunities like a laser beam….
“And this focus on emerging small businesses is paying off—operating income has more than doubled in the last four years. Net income is up almost 10 times in the last 6 years.
“All that cash is finding its way into the pockets of shareholders. Dividends are growing as the company grows and averages a 30% payout from net income every year, which is more than many U.S. companies with much bigger cash hoards pay out.”
Well, most experts don’t classify the world as having “more than 200 countries” just yet (the UN has 193 members), but that quote’s probably from the marketing materials saying the company is operating in “more than 200 countries and regions” … we’ll let it slide.
Here are a few more clues and enticements to get you revved up:
“They’re so far off the radar of major brokerages, they might as well be unlisted.
“And that’s a shame, because they really are a hidden gem.
“Yes, they have cutting edge technology (lasers, state-of-the-art wireless technology and more) incorporated into their latest products, but the real keys to the next stage of their growth are the kind that the world’s greatest global investor, John Templeton, would approve of.
“First, the company will accelerate their big push into developing markets…
“In these markets, our company’s products are essential to business success, but they aren’t yet commoditized. Less competition means stable and growing profits, not cutthroat warfare for every customer that kills profit margins….
“Second, they’re breaking out of their traditional business and expanding into ancillary business lines so they can offer total solutions and create a service business with consistent revenues and renewable contracts. That’s the same path good ol’ IBM followed to revolutionize their business when they stalled.
“Now, I can’t promise our company will become as large as IBM (one of the 25 largest corporations in the world), but I can tell you our signature stock is on the right path to capturing dominant market share in a growing and highly profitable business.
“And they’re remaking themselves on the fly, in the mold of perhaps the most successful tech stock of all time.”
Does that sound at all familiar? It’s quite similar to the pitch that Tom Dyson used with Xerox (XRX), a company that he said was poised to become the “next IBM” as it moved from hardware into services — I found that interesting enough to piggyback on it as our “Idea of the Month” about two years ago, and I’ve opened up that old note for everyone to see if you’re curious.
It worked out pretty well, actually, with Xerox eventually getting a richer valuation and reaching that “$14.25 in two years” potential that I theorized in 2013 based on closing the valuation gap with IBM — but the underlying business hasn’t kept up with the “revaluation” of the stock, and they’re really struggling to grow revenues or earnings at all, so I sold it last year when it seemed unlikely the shares could get meaningfully over $14 in the next couple years. And actually, they didn’t just close the valuation gap — they caught up with IBM’s PE valuation in mid-2014 and have been creating a new gap of their own (IBM’s PE ratio, with investors except for Warren Buffett gradually giving up on their potential, has declined slightly to dip under 14 as XRX’s has risen from 9 to 16).
But that’s getting off track, sorry — when I first started reading the ad XRX came to mind as a likely solution to the tease, but that turns out not to be the case, not only because the numbers don’t actually match the tease but because of this little tidbit they threw in later on…
“… the ‘cold war’ that could grow very hot in the next few months is the one between China and the U.S.
“The Chinese are tired of being accused of being software pirates, currency manipulators and cutthroat exporters, and they’re fighting back.
“By looking to replace the signature U.S. technologies they’ve relied on for the past 50 years with either homegrown or non-U.S. foreign suppliers….
“… the real battlefield is shaping up to be computer hardware: PCs, servers and printers.
“And that’s where our #1 stock is perfectly positioned to reap the rewards.
“It’s already a dominant player in this market, and it isn’t an American company.
“What’s more, it is already on an acquisition spree—snapping up manufacturers of complementary office products and expanding their product line to offer full spectrum solutions.
“So they are perfectly positioned to see their Chinese revenues grow exponentially if a China/U.S. trade war gets serious.
“And even if tensions cool between the two countries, Chinese policy will give non-U.S. companies like our #1 pick small advantages, like preferential treatment at the border and looser regulations on imports, which can make all the difference between ‘just getting by’ and making a fortune in China.”
So who is it? They start again to throw out the term they invented, “Innogration”, to pitch their idea that most of the real innovation in technology has already been done, and that the real profits now will come from the “integrators” who bring that innovation into more businesses or expand its reach. And one last little quote from the ad before we get you your answer…
“The company we’re calling The Tech Stock to Own for 2015 is a perfect illustration of innogration.
“It’s not only a market leader with its current technology; it’s acquiring and partnering with other companies in its field (business services and complementary technologies) to expand the playing field and become a de facto monopolist for businesses of all sizes….
“There’s no doubt that their entrenched competitors will make it tough on this company, but our examination of the company’s financials, management, strategy and especially their new integration with new partners tells us they will not just survive, but thrive in the years ahead.
“And that’s why we’re confident that an investment today in this stock will reward you with…
“At Least 50% Profits in the Next 12 Months”
OK, did I make you wait long enough? Fine… we’ll shovel all those little clues into the hopper of the Thinkolator, let it cogitate for a bit (this company is overseas, after all, we have to allow for travel time). But our answer does come popping right out the other end: this is Ricoh (7752 in Japan, RICOY for the 1:1 US ADR), the Japanese printer/document processing company.
And yes, it does have quite a bit in common with Xerox, the two are of similar size (Ricoh is a bit smaller, their market cap is $8 billion versus XRX’s $14 billion) and are in the middle of essentially the same transition: trying to stabilize their future by expanding into a variety of document handling, business, and IT services instead of relying just on hardware (printer) sales. Xerox is further along on that front, thanks largely to their acquisition of ACS a couple years ago, but Ricoh is certainly pitching IT services. They also still have some consumer-facing products, including both desktop printers and cameras, and industrial machinery, but document processing and large-scale printers and copiers for offices are really their core business.
It is also fairly cheap at these prices, though it has been for quite a while — and, like many of their competitors, they’ve been having a lot of trouble trying to generate growth in US$ terms. They have been growing pretty nicely, if not steadily, in their reported operating income, as teased (it really has doubled over roughly four years), but it looks less impressive when US investors translate that into dollars. They had operating income of 60 billion yen in their 2011 fiscal year (year ended 3/31/11) and 120 billion in yen in fiscal 2014, and they’re on track to do perhaps slightly better than that in 2015. If you translate that using roughly the currency exchange rate from when those reports were released, the 60 billion yen was about US$75 million in 2011, and the 120 billion yen today is about US$100 billion. So it’s still growth in US dollar terms, but it’s a 33% gain instead of a 100% gain. Big difference.
And the other clues match as well, of course — Ricoh was founded in 1936, and they’ve been pretty much in the office paper/copying/processing, office automation, and optics businesses the whole time. They’ve made computers, microchips (there were Ricoh chips in early Nintendo machines, for example), special sensitized papers, fax machines and most any office machine you can think of over the years, but the brand is primarily known by consumers for its cameras and projectors (they also bought Pentax a few years ago), and by everyone else for printing and photocopying, an industry it has sometimes led over the past 20 years — and that printing/document handling business ties in with the same general kind of document processing/document management “software as a service” offerings provided by Xerox and other competitors.
So while Ricoh’s business is on a reasonable trajectory, not terribly different from Xerox, it’s not all that sexy in US terms when it comes to either business growth or stock performance. The shares are up about 10% over the past year in Japan, but they’re down about 5% over the past year for US investors. And the dividend, while it is growing in yen terms, is shrinking in US$ terms. It does currently offer a payout ratio of about 30% (meaning that about 30% of net income is paid out as dividends), which is not wildly out of line with the “old tech” or “IT outsourcing” group… Xerox pays out about 40% of income as dividends, IBM about 35%, Canon about 60% lately, and the yields for all of them are also in the same general 2-3.5% neighborhood (Ricoh’s latest dividend is JPY34 for the year, so at JPY1,300 that’s a yield of just about 2.6%. The dividend was raised by 3% this past year — but that’s in yen, in dollars the dividend declined from roughly 33 cents to 29 cents over the past year.
There’s not much Ricoh can do about the yen — they don’t control their currency, and I have not read through all their filings or presentations to see exactly how they’re operating or whether they typically report gains or losses because of currency exchange on an operating basis… but the falling currency in Japan should also generally be a competitive advantage for them as an exporter. All of these major document handling and printing companies are global in nature, and Ricoh has acquired several US and German companies over the years, but they do get to incur a lot of their corporate expenses at home in Japan, in a cheap currency, and sell to China and the US where currencies are (in general) stronger. Of course, they also manufacture a lot in other countries, and they have major US-based and European businesses and have outsourced some manufacturing to lower-wage countries in Asia, so the rise or fall of the Japanese Yen is not the only factor influencing their success.
Whether Ricoh will enjoy any competitive advantage in selling to Chinese firms in the future because of competition between China and the US is a matter for some debate, I would imagine — China and Japan have a much frostier relationship than China and the US in general, since their shared history includes territorial disputes and regional security issues and a well-remembered history of armed conflict between the two countries that goes back 1,500 years, including horrific atrocities like the Rape of Nanking within just the last century. Like the Russians and the Germans, perhaps, the Chinese and the Japanese have tight business relationships and have to work with each other all the time… but they don’t sleep with both eyes closed (that’s a gross simplification, of course, but you get the idea).
And… that’s about all I know about Ricoh — interesting idea, I think it would likely take some major news or major currency fluctuations from this point to drive the shares up by 50% in 2015 as the teaser pitch seems to be implying, since growth in US$ terms seems to me to be a little iffy, but they are growing a bit in their reported currency and doing reasonably well on the operations front from what I can see. They are now projecting that this fiscal year will close out with earnings of 110 yen per share, which would be a current-year PE of between 11-12, and they do pay a decent dividend. They do continue to rely very heavily on production printers and office printing equipment and the networking solutions services they provide along with that equipment, and that’s also where the highest margins in their business are — the consumer products (cameras, etc.) break even, and the industrial products come in with 4-5% operating profit margins, but printing and imaging and services have operating profit margins of 9% or so… so when they are weak, profits disappear. My scan of the numbers, including this latest presentation of their 9-month results to December, gives me the impression that lately they’ve done pretty well, and are showing some earnings growth, largely because of the strength of color printing.
So how about it? Ricoh is not terribly expensive, they are growing in the US and Asia but having some weakness in Japan and Europe. They’ve had an up and down history when it comes to profitability, but have generally had decent growth over the past few years in their reported currency (and much more tepid growth in dollars), and there’s some indication that Japanese companies are growing to be kinder to outside shareholders — so perhaps their valuation will improve. Right now, they’ve got a PE of around 11 and not much growth (earnings are expected to be flat year-over-year when they report in a couple months), but they do pay a decent dividend and trade at a discount to book value, like Xerox did a couple years ago… so in theory, if they did post earnings growth of 10% and get to a PE of 15 to be more similar to the market, that could drive them to 1,800 yen per share over the next year, which would be a gain of about 35-40% from here. That sounds quite optimistic to me for the near term, given the lack of growth indicated in this year’s earnings, but perhaps I’m missing something (and I certainly do not have a handle on their strategic plans for the next couple years, I’ve just sniffed around in their financials for an hour or two).
Sound appealing or compelling? Agree that this is the #1 tech play for 2015, as the Smart Tech Investor folks are claiming, or do you have a better pick for the year? Let us know with a comment below. \
Disclosure: As noted above, I no longer own Xerox. I do currently own shares of Google and Facebook. I don’t own any of the other stocks mentioned in the article, and won’t trade any covered stock for at least three days.