Thinking Points
- Suzumo Machinery (6405) is well established in a niche sushi machine industry, holding 90% market share globally.
- Top-line CAGR of 8.7% in the past 9 years, with particularly strong growth in Europe and N. America.
- Run up in stock price over the past year probably puts Suzumo at fair value today, but further reading on the sushi market is necessary in order to have an educated discussion about continued growth.
Strong character with a strong market position
What I’m about to cover here is probably the most Japanese company on the planet. Suzumo loves rice and they build sushi machines.
If I had to guess, rice is just rice for most of the western hemisphere. However, many Asian countries take rice rather seriously, and Japan is no exception. It’s not uncommon for Japanese foodies and chefs to have a critical eye for rice. In fact, sushi rice is different from regular rice – a delicate combination of vinegar, sugar, salt, etc is used to make rice for sushi. Suzumo sushi machines deliver master sushi chef level quality consistently.
Source: Suzumo website
According to Sushirobo.com, a Suzumo distributor, Suzumo holds 90% market share in sushi machines. After doing some further reading, I haven’t seen any formidable competitors. However, I found a few seemingly smaller sushi machine companies – like Autec, Robotic Sushi, and Taiko. I’m not sure how Suzumo and its distributor figures that they have 90% share in the market. It’s hard to come across industry data in such a niche area and a simple Google search mostly yields Suzumo-related websites, with Autec having paid advertisements and one or two related listings on the first page. I’m inclined to believe that Suzumo’s 90% market share in sushi machines is probably right.
Solid Financials
Fair warning: Suzumo’s stock price about tripled over the past year:
Source: Financial Times (data obtained July 23, 2017)
This is a good time to look at basic historical financials:
Source: GuruFocus
With top-line CAGR of 8.7% over the past 9 years, the stock price rally looks justified. That said, the skeptic in me wonders whether the vast number of Japanese technical traders had something to do with the rally, considering the rapid rise (tripled in 1 year!). Fundamentals have continued to improve at Suzumo. At this point, it is probably important to figure out whether the market is projecting continued growth into infinity and pricing it in the stock.
As one might expect, a large proportion of revenues come from Japan. While Suzumo witnessed impressive growth in regions outside of Japan, like N. America (31.5% CAGR) and Asia (19.7% CAGR), revenue distribution by region has not dramatically changed over the last 9 years, thanks to a solid 9.1% CAGR in the homeland. In 2009, 86% of total revenues came from Japan, which decreased to 79% in 2016.
To be clear, management is not guiding for much growth: A 2% increase in sales and 4.7% increase in net income. That said, the trend has been for Suzumo to underpromise and overdeliver over the past several years. The 2018/3 reporting period will be the new CEO, Minako Suzuki’s (13.42% stake) first full year. I presume she is the daughter of the founder of Suzumo. Her President’s letter on Suzumo’s English website highlights the impact that their sushi machines have had on Japanese cuisine, both domestically and globally.
Thinking about risk
The healthy stock price appreciation over the past year combined with stellar business performance over the past decade makes it easy to tell perpetual growth story. Though Suzumo operates in a highly specialized area with little competition now, I still think it is valuable to assess what some of the potential threats are. There are several points I can think of. Here are 3 of them:
- Chinese competition
- Quality appreciation in different markets
- Different taste in different markets
“Our passion for rice is why we dedicated ourselves to creating machines that would do more than just streamline the sushi-making process – we wanted to ensure, first and foremost, that our sushi-making robots would produce something undeniably delicious.” – Minako Suzuki
Source: Suzumo President’s Letter
From a business perspective, the streamlining of processes is certainly attractive. The quality aspect, of course, is also a positive. However, an endless pursuit for quality won’t always yield returns, and quality means different things to different people. Therefore, I see the threat of Chinese manufacturers offering a “good enough” product for a lower cost as one of the major threats. While the Japanese market may have an appreciation for top-quality sushi rice (as defined by Japanese standards) with the perfect mixture of ingredients and the right amount of “fluff”, these qualities may go underappreciated in other markets. At least in theory, this changes the value proposition of a sushi machine in different regions.
Malcolm Gladwell’s commentary on the food industry’s pursuit of the perfect spaghetti sauce may further clarify what I am trying to say in the paragraph above.
Wrapping it up
With the recent run up in Suzumo’s stock price, the company is probably at fair value today (10x EV/EBIT). The runway for growth is interesting. Streamlining sushi production certainly makes sushi more readily available to the average family, both from a supply and cost perspective. What was once considered a luxury dish in Japan is far more common now. Perhaps the same story may come true in other parts of the world as well. Further reading on the global sushi market would be necessary before putting money into Suzumo.
Surely, investors can do a lot worse than investing in Suzumo. The balance sheet looks phenomenal, CEO has a significant stake (13.42%), the company offers a great value proposition, and they’ve been going at it for years with a strong market position. I would keep this company on a watchlist and look out for opportunities to buy in on volatility while reading more about sushi.
Tearsheet
