“101-Year-Old Samurai Sword Maker Collects $2.8 Billion from U.S. Energy Department”

By Travis Johnson, Stock Gumshoe, September 22, 2008

Interesting headline, eh? This ad has come my way a few times recently, in somewhat different forms, but the key company they tease is an interesting one … so I thought I’d share it with you today.

This ad for the Sovereign Society service, which will cost you $49 a year, tells us that we’re on the verge of making millions from a monopoly — and in return for signing up for a subscription, they’ll send you a special report called “The King of Stage 2 Monopoly Shares.”

And of course, Justin Ford, who signs the ad letter, promises that “you have nothing to lose and massive profits to gain.” As with all of these offers, what he means is that you won’t lose your subscription money — not that you won’t lose your shirt by betting on the company he touts. I’m sure they’d be happy to pay back the $49 you pony up for your subscription if you cancel during their free trial period — but if you happen to throw a couple thousand dollars at their ideas and you lose half of it, you are, of course, on your own.

Not that you’ll necessarily lose money — we haven’t even talked about what the stock is yet, and I can’t predict the future any better than they can. I just thought it would be worthwhile to again revisit the standard newsletter “satisfaction guaranteed” and “nothing to lose” offer — it means nothing to lose to them, you can still lose plenty to Mr. Market.

Or gain plenty, of course.

So what is this stock that has a monopoly business? I think we can all stipulate that being the only producer of something that the world needs is a good position to be in, whether or not we enjoy paying through the nose for their products. This is not Microsoft or Ma Bell, however, but a steel company.

Here’s a bit of an excerpt for you:

“Washington is about to cut a $2.8 billion check to a 101-year-old Samurai sword maker.

“And that’s just a down payment!

“From a rusting, soot-covered warehouse, this company has commanded the attention of Congress and Fortune 500 CEOs.

“General Electric and Hitachi have rushed their top brass to greet them — and hand over “pledges” of $50 million to $100 million…

“In three months alone – shareholders have raked in $2,600 in profits on every $5,000 they invested. But that’s peanuts compared to what’s next.

“Contracts are quietly being signed that guarantee this company massive growth — for years to come.

“And yet you can still buy their shares for less than $25!”

So what else do we learn about this company from the ad?

At the time the ad was written, the stock was up over 800% over the last three years.

It works in an industry that is about to be revived by the Energy Policy Act for the first time since the 1970s (OK, you can probably figure that one out just fine on your own — this relates to nuclear energy).

Who’s been buying this company?

“Invesco — the creator of PowerShares — just swooped in and bought over 23,000 shares — and they’re not alone. Several other funds have started to nibble — from John Hancock to American Century to Nicholas Applegate.”

And the promising, um, promises continue …

“In just a matter of weeks, they’ll be front-page news. Your neighbors will be scrambling to buy. But by then, it will be too late.

“You’ll have missed the biggest initial move of Stage Two.

“That’s why it’s so critical that you snap up this company NOW. Before mainstream investors pile on in record numbers.”

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Can’t you just taste it? Don’t you want to make sure it’s you that brags about this on in your golf foursome, not that annoying dentist from the club?

Well, just a small warning for you — I’ve seen this same email for about a month, and during that time it has gone down by close to 25% along with the rest of the market. Maybe that’s because everyone is worrying about the financial markets returning to the stone age and they forgot to buy this “guaranteed winnner” — or maybe it’s because, as with so many such companies, there’s no rush.

Here’s another small taste of the glamour and excitement of this little company …

“Secrets of the Samurai Revealed… this tiny company was forged in the heat of World War I — when they built turrets for the world’s biggest battleship. The navy trusted them with their lives…

“Today, they’re the most sought after metal-artists in the world…and their secret weapon will soon help power your home, clear the skies, and enrich your portfolio.

“Income nearly doubled over the past two years — and thanks to expansion efforts, it will likely double again…and again…and again.

“What’s so special about this company?

“Their most popular product costs $350 million.

“Why is it so expensive?

“Because other companies simply can’t produce it. I’m talking about a massive vessel — forged from a 600-ton piece of steel. The type of machinery that is critical to the success and the safety of the next generation of power plants.

“Without it companies like General Electric and Toshiba simply can’t do business.

“Customers are eagerly signing on despite a 7-year waiting list. They don’t exactly have a choice, because this Samurai company is the only one in the world that can fill their orders.”

And the stock has been on a tear, they say:

“In the last 90 days alone you could have made $2,600 in profits for every $5,000 you invested — just on this single play. And more than 8 times your money in the last 3 years. Yet it’s only now entering Stage Two.

“There’s still time to get in before the next big upswing…in fact, it looks like it’s just about to begin.”

All you have to do is sign up for your Sovereign Society subscription!

Oh, wait — or read the next line:

This company is Japan Steel Works (JPSWY for the 10:1 pink sheets ADR, 5631 at home on the Tokyo Exchange).

And it’s still “under $25 a share”, but that’s only if you buy your own shares in Tokyo — if you buy the ADR, each ADR share is worth 10 Japan Steel Works shares, so even though the price has fallen considerably over the last month or two, it will still cost you about $135 for one ADR. That gets you ten shares at $13.50, roughly — and when this article was written it could have been as high as about $230.

The typical Yahoo and other quote sites are often pretty bad for Japanese equities, but Bloomberg has some decent data on this one — you can see it here if you’re interested.

So — what do they do? Is this worth your money? They are a steel company, and they do have a tradition of making samurai swords, though I can’t imagine they make much money on that business currently, it’s more culturally than financially significant. The big thing that they do that almost no one else can is manufacture the central part of a nuclear reactor cooling vessel in one piece, with no seams. They do also make other stuff, but they’re known for being a steel maker that can cast huge things successfully — that bit about the navy was, as you might guess, the Japanese navy, but they did indeed make the barrels for what was the world’s largest cannon.

They can only make four containment vessels a year, and are investing to double capacity — but I’m sure you can do the math, four times two is still not a huge number, given worldwide growth in energy demand and the growing (again) interest in nuclear energy.

This casting process to create the massive containment vessels is, by most accounts, in part an art and in part just a very difficult and expensive steel forging process. Their plant in Hokkaido survived Allied bombing in World War II, and with the last 30 years of flagging US interest in nuclear power, and the big investments and specific expertise needed, none of the US steel companies have focused on this at all. The Russians build their own containment vessels, and other competitors are trying (mixed results) to establish this capability or a competing process, but everyone else comes to Japan Steel Works.

And they’re certainly placing orders — JSW is an expensive company based on just the PE ratio, which is reported at 30, it has a piddling little dividend, and it wouldn’t catch your eye at all if it weren’t for that “monopoly” and their huge backlog. Companies line up to reserve spots in their production timeline many years out, and apparently they’re pretty well booked until 2015. That doesn’t guarantee that these companies will all end up completing their purchases, even after their $100 million down payment goes through, but it’s probably a reasonably safe guess — they have to order from Japan Steel a long time before they get regulatory approval, at least for those who are planning to build a plant in the US, so if a few of those don’t get approval I suppose there’s a chance the company could suffer. More likely, probably, the demand from other countries would make up for it unless nuclear power suddenly becomes less popular in France, China or elsewhere.

The biggest risk to this growth, other than worldwide stoppage of the nuclear energy buildout, is probably competition — some argue that other types of manufacturing are OK for these vessels, that they don’t necessarily have to be cast in one piece to prevent radiation leaks. And who knows how the Russians make theirs, but perhaps they could enter the market if they make a good product. And if nuclear power looks like it’s taking off in a sustainable way, someone could invest a hundred million bucks to build a competitor. There’s a good Bloomberg article about the company here if you’d like to begin your own research.

The shares were hugely popular this past Summer, following that Bloomberg article, and spiked up dramatically from about $140 early this year to above $220 in June. They have fallen quickly from that level, to where they trade now at, again, just below $140. It looks promising that they have such a huge backlog and what looks like a defensible niche in their specialty, but it should cause at least a little concern that you’re buying a steel company that depends almost entirely on nuclear power plant growth — when Germany got out of the nuclear power business in 1998 for political reasons, Japan Steel suddenly went unprofitable for three years. Experts say that the world will be building up to a dozen reactors a year for the next decade, and the company believes that it would take a competitor five years to build up to this capacity to infringe on their market, but neither of those is guaranteed.

Oh, and it is Japan — so you get very little visibility into the company, shareholders don’t have much power, and the exchange rate could play havoc with the ADR share price for good or ill. It’s also a fairly small company in a nation of conglomerates. That’s not to say it’s a bad investment — it’s hard to topple a monopoly, and a monopoly in a relatively small business niche can be hugely profitable for shareholders, but do keep in mind that you’re certainly paying a premium for this company compared to similarly sized steel companies, even at the current depressed price.

It might be worth it, it might not — that’s your call … if you’ve got a feeling or a thought about Japan Steel Works, please feel free to share.