Idea: Consistent 60+% Greenblatt ROIC For… Weather Data? – Weathernews (TYO: 4825)

Thinking Points

  • Weathernews is one of the world’s largest private weather data service.
  • After its start in Ocean route planning, Weathernews now offers consulting and data services to airlines, railroads, TV stations, consumers, and many other areas.
  • Leveraging its healthy ROIC performance, Weathernews is exploring different avenues for market and service offering expansion.

Today’s post is an overview of Weathernews (TYO: 4825), one of the world’s largest private weather data service in existence. Credit for the idea goes out to one of our readers (and earliest supporters), Paul (Thanks!). He introduced me to Weathernews several months ago and I finally got around to digging.

The founding of Weathernews

The story behind the founding of Weathernews is filled with passion. Once upon a time (1960-70s), Weathernews founder Hiro Ishibashi worked for a Japanese trading company. He was in charge of chartering cargo ships to move material. In January of 1970, one of his chartered ships was headed to the Osaka port. Right before the ship’s arrival, Hiro was informed that the port had some serious traffic congestion – so serious that there would be a 10 day delay in unloading. To make matters worse, demurrage charges for 10 days was expected to cost 20 million yen. Hiro found a solution: Reroute the ship to the Fukushima port, which only had a 1 day delay for unloading.

The plan was solid. However, shortly after the ship arrived at the Fukushima port, a weather bomb hit. Violent waves crashed Hiro’s chartered ship into the seawall. The ship went down, taking the lives of 15 crew members. Hiro, who was known to frequent the ports to work and socialize with the folks taking care of daily operations, was deeply affected.

Not long after the accident, Hiro jumped into Oceanroutes, an American consulting company specializing in route planning for ships (which included weather services). After gaining knowledge on weather info gathering, Hiro started Weathernews in 1986 with the hopes of making ocean travel safer. Seven short years later in 1993, Weathernews acquired Oceanroutes. To this day, there is a newspaper dated January 31, 1970 with a headline about the accident right at the entrance of Weathernews HQ.

Weathernews today

Today, Weathernews has expanded beyond the ocean. The company offers weather-incorporated consulting services to airlines, railroads, retailers, TV stations, consumers, etc.

Oddly, Weathernews’ biggest competition is Japan’s Meteorological Agency. In fact, the Japanese Wikipedia page for Weathernews shows several occasions where the two organizations went head to head on a couple issues, mostly related to the differences in interpretation of Japanese meteorological business law.

According to a 2009 Enterprise Watch interview, there were about 50 private weather forecasting companies. Every company except for Weathernews purchased weather data from Japan’s Meteorological Agency. In other words, there were two sources of weather data in Japan back in 2009: the Japanese Meteorological Agency and Weathernews.

Interesting Developments

There are two particularly interesting points about Weathernews that spoke out to me (so far):

  1. Hybrid of device and people input for weather data
  2. Company satellite launch

Most people can guess that a weather data service would have different types of techie sensors installed all over the place for data collection. What most people probably wouldn’t guess is that Weathernews also gets weather reports from individuals. According to Nikkei (Japanese), the company has about 13,000 different locations setup with Weathernews’ proprietary weather measurement and data collection system. In addition to that, Weathernews gets over 130,000 weather reports a day from individuals. This is literally people walking outside at specific locations (like the neighborhood park) and reporting whether it feels humid, chilly, windy, etc outside. Maybe this sounds silly to some, but retailers find this data useful. For example, convenience stores would prepare hot coffee by the cash register on a summer morning if a temperature drop recorded vs. the previous morning.

The other interesting development is the company satellite. Weathernews launched its first satellite in 2013, which was briefly successful, until some of the electronic components started malfunctioning. Overall, it ended in failure. However, earlier this year, Weathernews successfully launched a second satellite, which has been functioning well so far. There are two main ideas behind the satellite: measuring ocean current and operating as a communication device.

Currently, Weathernews’ optimum ship routing (OSR) business targets about 10,000 ships. This doesn’t include ships making short trips (~few days). Ships making short trips tend to focus more on ocean current vs. weather. Weathernews estimates that the market for OSR business would double if it can successfully report ocean current movement.

Another satellite related opportunity for Weathernews is in airline routing. More specifically, airline routing in areas where communication infrastructure isn’t developed. Often times, in many parts of Southeast Asia, airplanes take off only equipped with weather reports of the destination. Even if Weathernews placed its weather stations in various parts of SE Asia, it wouldn’t be able to collect data in real-time because of the underdeveloped communication infrastructure. If the weather stations can communicate with Weathernews’ system through satellite, the company would be able to expand its real-time service offerings.

Financials

B2B (ocean, airline, railroad, etc) services accounted for 60% of revenues and B2C (TV station, consumer) services accounted for 40%.

Here are simplified 10 year financials:

 

According to GuruFocus’ Joel Greenblatt ROIC calculation (basically removes cash in excess of operational needs from denominator), Weathernews has consistently delivered a more-than-healthy 60~95% ROIC over the past 10 years. With a net cash position of 5,883 million yen (15% of market cap), the balance sheet is strong. Over the past couple years, Weathernews started started paying out more than half of its net income – probably because the heavy cash position started dragging ROE performance, which fell from 27% in 2008 to 15% in 2017. As a result, the current dividend yield stands at a nice 2.8%.

In the past 10 years, EV/EBIT has remained mostly in between 6 and 10x. Today, Weathernews trades at 11x.

Weathernews has gone on a hiring spree, increasing headcount by 15% in two years. Management commented that they are trying to increase development strength. According to the mid-term plan, Ocean OSR expansion is top priority. Despite the recent downturn in global shipping, Ocean OSR has grown from servicing 1,200 ships in 2012 to 3,000 in 2017, or a 16% CAGR in ship count (though unit margins slightly declined recently).

Of course, the company has other initiatives, like its Asia expansion, B2C global weather reporting network expansion, and satellite weather infrastructure and technology development, which are all mentioned in the mid-term plan.

Overall, management is guiding a revenue increase of 4.9% CAGR through fiscal 2019 with an operating income decrease of negative 5.9% CAGR for the same period. This is mostly due to the increased headcount. By 2020, Weathernews expects operating income to go beyond today’s level.

The bottom line

I’m glad I started looking into Weathernews (thanks again, Paul!). Given management’s near-term guidance, I think investors have some time to carefully analyze the company, which I will most certainly do. Since the beginning of 2014, Weathernews stock has gone from 2,000 yen-ish per share level to mid 4,000s and back down to today’s 3,500 yen-ish per share. I wouldn’t be surprised if the volatility continues, especially with the prevalence of short term trading in Japan. Even with just a surface level look of Weathernews, I find it difficult to go wrong investing in this company, particularly because of the unique value proposition and consistent (and outstanding) ROIC performance.

Author: Clayton Young

Hi! I’m Clayton. My value investing journey began in 2012 during my college days. It was not until recently (2016!) that I decided to leverage my Japanese language skills to research Japanese equities. I hope to provide valuable insight on Japanese companies to the English-speaking world through this blog!

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