By Andrew Bary
Subaru has a cult following among U.S. auto buyers who like its rugged, all-wheel-drive cars like the Forester, Outback, and Crosstrek.
The well-managed Japanese auto maker produces about a million cars annually. About two-thirds of its sales are in the U.S. with less than 10% in its home country.
It has an inexpensive stock and investors could benefit from further consolidation in the Japanese auto industry -- a trend that may be getting under way given talks between Honda and the smaller Nissan.
Subaru's U.S. shares $(FUJHY)$ trade around $8, down 8% this year and half of where it stood 10 years ago. The more active Japanese shares trade around 2,600 yen. Two U.S. shares are equal to one Japanese share.
"It's profitable and grossly overcapitalized and trading for around five times earnings," says Matthew Fine, a portfolio manager for the Third Avenue Value Fund, which holds the stock.
The company has a market capitalization of around $12 billion and is sitting on about $7 billion of net cash, meaning investors are paying little for its car business which is expected to earn about $2 billion in the current fiscal year ending in March. Subaru trades for about 70% of book value and the stock yields about 4%.
Fine notes that Subaru has a long history of profitability. Most of its cars sold in the U.S. are produced at a plant in Indiana and the company's CEO Atsushi Osaki said recently that the company has room to increase U.S. production if President-elect Trump decides to impose a uniform 10% tariffs on imports.
The company has a loyal group of U.S. buyers who tend to live in the Pacific Northwest or Northeast and often are safety conscious.
Among the knocks against Subaru is that it -- like some other Japanese auto makers -- doesn't have a well-defined strategy for potentially transitioning to electric vehicles. The company has set a target that 50% of 2030 sales would be all-electric cars and is spending about $10 billion on electrification initiatives by 2030.
Fine says that the company aims to preserve its options, noting that electric vehicle sales have stalled at around 10% of U.S. sales and are near zero in Japan.
The Japanese auto industry is divided into spheres led by Toyota and Honda, the two major producers. Honda is pursuing a link with Nissan while Toyota owns a 21% stake in Subaru, as well as having an interest in Mazda.
Subaru's Forester is similar to the Honda CRV and Toyota RAV4 crossovers, with the Forester having standard all-wheel drive and a higher ground clearance.
Fine says it's possible that Toyota, which sells about 10 times as many cars as Subaru and is valued at more than $200 billion, could seek to buy Subaru.
"We acknowledge the possibility that...Toyota could acquire Subaru and its valuable niche brand to substantially enhance significant synergies already being capitalized upon through existing partnerships and collaboration," Fine wrote in a shareholder letter in October.
A weak yen has depressed the U.S.-listed Subaru shares but the yen could be bottoming
Auto stocks are cheap around the world with companies like Mercedes-Benz Group and BMW sitting on a lot of cash and other assets while trading for just six times forward earnings. Tesla's market value of $1.4 trillion is more than the rest of the industry combined and it trades for over 100 times forward earnings largely on autonomous driving hopes.
But Subaru has a distinctive brand, a loyal American customer base, a great balance sheet, a cheap stock and potential takeover value in an auto industry that could see greater consolidation in the coming years.
Write to Andrew Bary at andrew.bary@barrons.com
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(END) Dow Jones Newswires
December 27, 2024 21:30 ET (02:30 GMT)
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