Date: September 2012: Why Kyocera Stock Could Rise at Least 30% - Barrons.com

When Tetsuo Kuba was promoted to president of Kyocera in April 2009, the Japanese company was marking its 50th anniversary year, but had little to celebrate.

Battered by the global recession and the financial crisis, most of its main product lines—ceramic and semiconductor components, electronic devices, solar panels, copiers, and cellphones—were struggling. Profits were plummeting, and the outlook was grim.

Recalls the now 59-year-old executive: "Those were rough times, but I felt like I was on some kind of divine mission to make sure that Kyocera not only survived, but moved up to a new level."

Divine or not, that mission is being fulfilled.

Kuba, a native of the southern island of Kyushu, has rejuvenated management by adding younger executives, cut costs aggressively, restored profit growth, strengthened Kyocera's cellphone unit, expanded its solar business, and boosted the company's international operations through mergers, acquisitions, and investments in India, the Philippines, Europe, and elsewhere.

Morgan Stanley MUFG Tokyo analyst Shoji Sato says Kuba "not only restored earnings power, but used the company's tremendous cash reserves to further broaden its reach globally and expand its portfolio of products through strategic acquisitions."

FOUNDED IN 1959 as Kyoto Ceramic to make insulators for cathode-ray television tubes, Kyocera now uses its knowledge of ceramics to produce thousands of types of electronic parts and components for semiconductors, photovoltaic cells, office equipment, cellphones, digital cameras, flat-panel TVs, and other devices. It also produces hypersharp ceramic knives favored by professional chefs and amateur cooks alike.

The turnaround under Kuba has revived the company's stock, listed in Tokyo (ticker: 6971.Japan) and in New York (KYO), where it trades in the form of American depositary shares. The U.S. shares, each equal to one Japanese share, had slid from the high 90s to under 50 in the year before Kuba came onboard; they're now around 82. Bulls assert that the stock, which offers a dividend yield of 1.9%, could rise another 30%-35% or so over the next 12 months.

Sato rates the Japanese shares Overweight, with a 12-month target that would convert into a $114 ADS price. In part, he says, the stock is being driven by a sharp recovery in Kyocera's solar earnings, plus stable profit gains from its ceramic-based components—a market in which it commands a 70% global share. "We are urging our clients to shift into cash-rich, stable-growth firms like Kyocera," the analyst adds.

Kyocera has a stock-market value of $15 billion, about a quarter of which represents its nearly 13% stake in KDDI (KDDIY), a Japanese telecom whose stock has slipped a bit lately after recovering nicely from a late-2011 fall. Kyocera also has a solid balance sheet, with little debt and about $10 billion in cash—around $57 per share. That means investors are paying only about $24 a share for Kyocera's actual businesses.

In its fiscal year ended March 31, Kyocera was hurt by the effects of the devastating earthquake and tsunami that rocked northern Japan in calendar 2011. Operating profit skidded 37.3%, to 97.7 billion yen ($124 million) on a 6% fall in sales to ¥1.19 trillion. Results also were hurt by the strength of the yen, which reduced the value of sales abroad when translated into Japanese currency. Per-share earnings fell about a third, to ¥433, from ¥667 the year before.

Most analysts expect a recovery in the current fiscal year, even though sales and profit were down 2.5% and 73.5%, respectively, in the first quarter, ended June 30. The earnings decline mainly reflected a $266 million one-time charge to cover the cost of cleaning up a PCB (polychlorinated biphenyl) spill in New Bedford Harbor, Mass., at Kyocera's 72%-owned AVX subsidiary.

For the full year, analysts see profit rising 8.7%, to ¥471 yen per share, on a 15% increase in sales, to ¥1.37 trillion yen. Most of the gain should come from growing demand for high-margin ceramic components for smartphones and tablets, plus improvement in the government-subsidy-dependent solar-cell market.

"The biggest growth driver for us right now is solar," says Kuba. Kyocera is Japan's largest producer of solar cells and modules for industrial use. It has 30% of the solar-cell market in its homeland, and plans to move into another part of the business by building and operating with two partners a 70-megawatt solar-power plant in southwestern Japan.

LAST JULY, IN RESPONSE to the loss of power-generation capacity following the Fukushima nuclear meltdown, the government launched a tariff program that requires utilities to buy electricity generated by solar, wind, and other renewable-energy sources at fixed, subsidized prices over the next 20 years, bolstering the outlook for Japan's solar-power industry—a huge plus for Kyocera.

Kyocera estimates that it has 40% of the Japanese market for solar power for industrial use. As a result, it is seeing a sharp rise in solar-related orders; they're up 200% since last March. Kyocera's solar-generating facilities are currently operating at capacity.

Analysts expect solar sales in the three months ending next Sept. 30 to be 35% to 40% above the corresponding stretch of last year. And they see margins climbing as a result.

That's certainly welcome news for Kyocera's shareholders. And it's further proof that Kuba is on his way to completing his mission. 

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