Fuji Corp Miyagi (7605 JP)

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When the brilliant Twitter account Ocular Investor mentioned Japanese tire retailer Fuji Corp Miyagi (6503 JP - US$187 million) last weekend, I was intrigued.

Here is a company that has grown its earnings per share at a 14% annual rate for two decades yet trades at only 6x P/E. What’s the catch?

Fuji Corp Miyagi － not to be confused with machine tool maker Fuji Corp Aichi － is a Japanese automobile tire retailer run by a hungry entrepreneur, Fumiki Endo. He founded the company in 1971 and continues to push the company forward.

Today, the company has 48 outlets selling tires, wheels, and car accessories. In contrast with the competition, Fuji focuses almost entirely on tires & wheels and sells them at discount prices.

The entire company is built around efficiency and low cost. The store buildings are often bought second-hand and renovated to lower prices. Store layouts are simple and functional but certainly not fancy. And Fuji Corp has built several automated warehouses offering many SKUs yet with decent inventory turnover.

Customers comment that Fuji’s prices are the lowest in the industry, and the selection of products is great. But there are also complaints about simple store furnishing and long waiting times. Fumiki Endo has purposefully sacrificed some aspects of the customer experience to maintain low prices.

The low price point is what’s enabled Fuji Corporation to take market share. The runway of growth remains long. Consider this: competitors Autobacs Seven and Yellow Hat have 588 and 735 domestic outlets compared to Fuji’s 48. There is immense potential for growth.

And Fuji has also been successful in its e-commerce operation. While the company’s segment breakdown is confusing, most sales now come from online sales, whether delivered to stores or customers’ homes.

The industry is slow-growing, with the total auto parc stagnant over the past few decades. But a potential shift to heavier electric vehicles could wear out tires faster than before, requiring more frequent purchases.

And Fuji is taking market share thanks to its low-price focus and e-commerce operation. With greater online sales, I expect revenues to grow in the high single-digits and margins to expand.

With this in mind, the P/E ratio will likely drop from 7x to about 5x by 2026. Meanwhile, the net cash position represents roughly 24% of the market cap.

While the dividend payout ratio of 14% is disappointing, I find it encouraging that Fuji’s return on equity has consistently been around 15-20%, suggesting that capital has been reinvested wisely. The company repurchased roughly 10% of shares outstanding in 2022, most of which were cancelled.

Is there a catch? I don’t think so. Fuji Corporation appears to be a well-managed discount retailer taking market share year in and year out. The weather will have an impact on the results and fluctuations in raw materials prices. But across the cycle, customers are likely to be attracted by Fuji’s low prices.

It’s just a question of when investors will start paying attention.

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