Philippine Markets Newsletter

Uniform Accounting calculates this company’s focus on innovation paid off, garnering Uniform ROA of 9% instead of 5%

May 26, 2021

This company has pursued innovation since the day of its incorporation, and because of this, it is able to perform strongly in the calculator and wristwatch markets.

However, as-reported metrics do not seem to reflect that, reporting weak profitability. Uniform Accounting shows that the business has a better Uniform return on assets (ROA) than what you might think.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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The history of the calculator is a long one, spanning thousands of years. After the creation of the abacus in 2000 B.C., it took until the 17th century to have the first mechanical calculator invented by Blaise Pascal. A few hundred more years later, this device would get its most crucial transformation.

With the help of the semiconductor boom in the 1960s, calculators transitioned from mechanical to electronic, which eventually led to the calculator wars between Western and Japanese manufacturers in the 1970s.

One of the features manufacturers focused on was the calculator’s size. Since earlier electronic calculators were bulky and inconvenient to bring around, companies raced to make a portable version—the pocket calculator.

Through the years, competition grew fierce as companies tried to pack as many features as they could while still offering the product cheaply. Many manufacturers were unable to keep up with the price wars and eventually bowed out of the market.

The market finally came out with five dominant players: Texas Instruments (TI), Hewlett Packard (HP), Sharp, Canon, and Casio.

Founded in 1946 as Kashio Manufacturing, this company manufactures a variety of electronic devices, primarily calculators. It was then incorporated in 1957 under the name Casio Computer Co. Ltd.

From the early years of its operations, this company has been capitalizing on innovation and invention.

Around the time of its incorporation, Casio invented the very first fully electric compact calculator. Following this, the company also pioneered the world’s first desktop calculator with memory function.

With its continuous efforts to innovate, Casio was able to develop the first ever scientific calculator with a graphing function in 1985, a calculator with natural mathematical display in 2004, and one with a spreadsheet capability in 2015.

These innovations helped Casio maintain its brand reputation and stay at the top of the market as one of the world’s biggest players in the electronic calculator space.

Casio is also known for manufacturing both analog and digital timepieces, and the company also capitalizes on innovation in this space.

In 1983, Casio introduced the world’s first shock-resistant timepiece, G-Shock. The company continuously improved this brand, developing more features like resistance to low temperatures, mud, and water.

Moreover, Casio incorporated features to its watches that utilize today’s technology. Innovation made it possible for the company to develop a wide range of watches, from solar-powered ones to those that automatically correct time to watches that can connect to the internet or link to a smartphone.

As testament to the company’s innovative spirit, G-Shock is able to retain its popularity, with over 70 million units sold since the day it was launched in 1983.

The company’s efforts to innovate made the company a staple name in the electronic calculator market, and one of the top players in the wristwatch market. With that, investors would expect Casio to generate impressive returns.

However, as-reported metrics show that the company’s performance has been weak, showing an ROA of just 5% in 2020.

Uniform Accounting, on the other hand, tells a different story.

Specifically, the company’s Uniform returns are actually significantly higher than its as-reported metrics in recent years. In 2020, while as-reported ROA was only at 5%, Uniform ROA was actually 9%.

What as-reported metrics fail to do is to consider the company’s excess cash on the balance sheet. While most companies inherently need some level of cash to operate, the portion of that balance that is earning limited or no return—or excess cash—ends up diluting as-reported ROAs.

When excess cash remains included in the company’s asset base while computing its performance metrics, the company’s profitability and capital efficiency may appear weaker than it actually is.

Removing excess cash allows investors to see through the distortions that come from management carrying much more cash on the balance sheet than what is operationally required.

From 2005 to 2020, Casio has had a significant amount of excess cash sitting idly in its balance sheet, ranging from 10% to 31% of its as-reported total assets.

After excess cash and other necessary adjustments are made, we can see that Casio’s current returns are actually a lot stronger than what as-reported metrics show. Without these adjustments, it appears that the company’s innovative efforts are not translating into profitability, leading to significantly poorer valuations.

Casio’s profitability is much more robust than you think

As-reported metrics are distorting the market’s perception of the firm’s profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics reveal.

Casio’s Uniform ROA has been higher than its as-reported ROA in recent years. For example, when Uniform ROA was at 9% in 2020, as-reported ROA was only 5%.

The company’s Uniform ROA for the past sixteen years has ranged from -9% to 13%, while as-reported ROA has ranged only from -4% to 7% in the same timeframe.

Specifically, Uniform ROA declined from 9% in 2005 to negative levels in 2009-2011, before rebounding to a 13% peak in 2016 and remaining at 8%-12% levels from 2017 onwards.

Casio’s Uniform earnings margins are weaker than you think but its robust Uniform asset turns make up for it

Volatility in Uniform ROA has been driven by trends in both Uniform earnings margin and Uniform asset turns, with peaks and troughs lining up historically with that of Uniform ROA.

Uniform margins declined from 4% in 2005 to -7% in 2010. Then, Uniform margins recovered to 8% in 2016, before stabilizing at 6%-8% levels from 2017-2020, currently sitting at the lower end of that range.

Meanwhile, Uniform turns gradually declined from 2.0x in 2005 to 1.3x levels in 2013, before stabilizing to 1.5x-1.6x levels from 2014-2020.

SUMMARY and Casio Computer Co., Ltd. Tearsheet

As the Uniform Accounting tearsheet for Casio Computer Co., Ltd. (6952:JPN) highlights, the Uniform P/E trades at 15.1x, which is below the global corporate average of 23.7x but around its own historical average of 15.0x.

Low P/Es require low EPS growth to sustain them. In the case of Casio, the company has recently shown a 24% Uniform EPS decline.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Japan’s Modified International Standards (JMIS) earnings and convert them to Uniform earnings forecasts. When we do this, Casio’s sell-side analyst-driven forecast is an 18% and 26% EPS growth in 2021 and 2022, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Casio’s JPY 1,767 stock price. These are often referred to as market embedded expectations.

Casio is currently being valued as if Uniform earnings were to have immaterial shrinkage annually over the next three years. What sell-side analysts expect for Casio’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

Furthermore, the company’s earning power is 2x above the long-run corporate average. Also, cash flows and cash on hand are 3x its total obligations—including debt maturities, capex maintenance, and dividends. All in all, this signals a low credit and dividend risk.

To conclude, Casio’s Uniform earnings growth is in line with its peer averages, and the company is also trading in line with its average peer valuations.

About the Philippine Market Daily
“Wednesday Uniform Earnings Tearsheets – Asia-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under UAFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one company listed in Asia that’s relevant to the Philippines and that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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