Tom Konrad CFA
I missed Shimano (SHMDF.PK) in my recent list of bicycle and scooter stocks, but in many ways, Shimano is the best of the lot.
Shimano Inc. manufactures bicycle components and fishing and rowing gear, with the bike segment accounting for about four-fifths of sales, but I had not realized that they were public until I received a note from a reader in response to my recent article on bike and moped stocks.
In that article, I noted that, while bike sales rose in response to rising oil prices in 2008, bicycle repairs surged far more. As a manufacturer of components, Shimano may be better placed than other bike companies such as Giant Manufacturing (GTMUF.PK) and Dorel Industries, Inc (DIIBF.PK) to take advantage of a surge in bike repairs.
Shimano has a 70% market share in some key components such as gear wheels, derailleurs, and brakes. This is possibly due in part to a corporate philosophy that keeps Shimano from competing with its customers by not building complete bikes. If Shimano did build complete bikes, many bike manufacturing firms might feel compelled to return the favor by making their own high-end components. As it is, Shimano’s place in the bicycle industry is a lot like Intel’s place in the computer industry: the maker of many of the highest tech components manufactured with great precision to exacting specifications, and, in fact, Shimano has often been called “The Intel of the bicycle industry.” Many bicycle buyers care more that it is made with Shimano parts than which manufacturer does the final assembly.
Two Edged Sword
For investors, the high-end nature of Shimano’s products is a two-edged sword. The benefit is that Shimano’s continual research into new technology and strong brand recognition create barriers that help the company maintain market share and margins. The company’s large market share also helps reduce unit cost of production, allowing the company to fend off competition with relatively low prices while maintaining profit margins. The problem is that the high-end components in which Shimano specializes are less likely to appeal to more casual riders who are interested in using their bikes to run a few local errands than to more hard-core cyclists. It was this class of casual rider that accounted for most of the new riders in 2008, when high gas prices caused a surge in interest in cycling.
On the other hand, not all of Shimano’s products are made for the wanna-be Lance Armstrongs of the world. For instance, Shimano introduced an automatic gear shifter for bicycles in 2003, designed with the urban commuter in mind. For someone whose largest concern is dodging traffic and the morning meeting he’s preparing for, an automatic shifter is just the thing.
Shimano has an extremely strong balance sheet, a large plus in the current economic climate. The company has no net debt, an extremely high current ratio of over 5, and strong cash flow from operations even when revenues were depressed by the recession in 2009.
With so much going for the company, the stock trades at a very high valuation. At the recent ¥4,350 ($52.50) stock price, the company pays a 1.4% annual dividend, and trades at a P/E ratio of about 32. As a value investor, I’d like to see the stock drop 30-50% before I’d be ready to buy it. At the right price, this is certainly a company I’d like to own.
DISCLOSURE: No position.
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Shimano does make a lot of ‘low end’ bicycle components too. In fact, in total sales and, I would guess that their more basic components like 3-speed internal geared hubs are actually one of their most highly sold items on the world market. While consumers in the US may want ‘the best’, consumers elsewhere just want something that will work well in all weather, every day. Shimano is very well known for providing just that function.
But most interestingly, because of their manufacturing processes, the only major difference between their low end components and their highest end components is a few ounces in weight and the materials specification. While the average consumer is happy with steel, the racer wants carbon fiber or titanium. But, the tolerances and design of the parts are the same, so the practical performance is equivalent.
Thanks for the clarification. That makes the stock even more interesting… I wish the price would come down, though.