Author: Felix Tong
Covestor model: Long Term Core Holdings
Disclosure: No position in Olympus
The month of November offered a very interesting opportunity with Olympus (OCPNY.PK). Though details continue to emerge, indications are that Olympus kept losses from acquisitions hidden from shareholders. This situation caused a dramatic drop in the ADR price from $32 per ADR on Oct. 13, 2011 down below $6 per ADR on Nov. 10, 2011.
Though cameras are the first thought that pops into many people’s minds when they hear the name Olympus, that is actually only one business segment the company operates in. According to the 2011 Annual Report, Olympus operates four business segments: Medical Systems, Life Sciences & Industrial Systems, Imaging Systems, and Information & Communications Systems. Of these segments, the one that interests me most as a value investor is the Medical Systems Business.
Market share data indicated on page 13 of the annual report show that Olympus controls 70% of the global gastrointestinal endoscopy market. In the Japan, North America and European markets, Olympus controls 50% of the urology field and 30% of the otological field. Based on this, it is clear Olympus’s Medical Systems Business is a powerhouse in the endoscopy market.
In fiscal year 2011, the Medical Systems Business had an operating income of $886,425,000. This information is found on page 59 of the 2011 annual report. There are 271,823,608 shares outstanding (annual report pg. 67), and each ADR represents one common share.
When the Olympus ADR briefly fell below $6, this gave Olympus a market cap of approximately $1.63B. So for a puny 1.8 times fiscal year 2011 operating income, you could purchase a dominant medical devices company while receiving the rest of Olympus for free.
Source: Google Finance
The rest of Olympus’s business segments do not appear to have the strong moat of the Medical Systems Business, although the Life Sciences & Industrial Systems, and the Information & Communications units still have produced positive earnings. The Imagining Systems segment has produced negative earnings in recent years, and does not lend itself well to valuation, in my opinion.
Hoya recently sold Pentax Imaging to Ricoh for a reported ¥10 billion. Pentax has a significantly smaller world wide market share for digital cameras than Olympus, implying that Olympus’s imaging unit has a private market value of at least ¥10 billion. Even Olympus’s money losing business unit has a private market value. It seems to clear to me that there is a lot of value in Olympus at these prices.
As mentioned earlier, this opportunity came about from an accounting scandal and financial statements will need to be restated. I do not believe that income numbers will be dramatically changed from the annual report, so this made for an excellent entry point.
Unfortunately, while doing my due diligence on Olympus stock, the price quickly recovered before I could initiate a position, no longer making it a “no brainer” for me. The stock still presents a great value I believe, and I still may purchase stock for the portfolio. However, with a low cash position I have been extra cautious in initiating any new positions.
Olympus presents a great example of how my earlier aggressive action to create the current portfolio has created a situation where I have less flexibility for opportunities that arise.
