International diversification could be a good thing with BRDCY

October 2, 2018

International diversification could be a good thing with BRDCY

One of the principles a lot of investment advisors and money managers point to when they talk about risk management is diversification. Diversification means spreading your investing dollars across multiple different opportunities. The general idea is that the greater your diversification, the less exposed you are to risk in any one stock. In general, the idea makes sense; if one of the stocks you’re invested in is going down, but is in a different industry than the other stocks you hold, there’s a good chance one of those other stocks is going up and counterbalancing the risk that one negative stock represents to your overall portfolio.

Another interesting way that you can apply diversification is by thinking in global terms. While the world is certainly a smaller place today than it was even just a few years ago, and the economies of different nations and regions are becoming more and more interdependent all the time, it is also true that directing a portion of your attention to investing opportunities outside your own national borders can open new, different opportunities, even with stocks that may operate in the same general industry as other stocks you’re more familiar with.

Bridgestone Corp. (BRDCY) is a good example of what I’m talking about. If you own a car and had to buy replacement tires – something that most of have had to do at some point – you’ve probably heard of Bridgestone. This Japan-based company is the largest tire manufacturer in the world, competing with with U.S. tire manufacturers like Goodyear Tire & Rubber (GT) and Cooper Tire & Rubber (CTB) as well as European producers like Michelin (MGDDF) and Continental AG (CTTAY). Like GT and CTB, their stock is trading at a pretty big discount right now to its historical levels; but unlike those two U.S. manufacturers, operates with the largest margins in the industry. Being a foreign-based company means that they don’t follow the same kind of reporting requirements or schedules dictated by the SEC for stocks listed on U.S. exchanges, however their financial statements do make it pretty clear that their fundamental profile is as good, if not better than either of the two U.S. stocks in the industry. Their low trading price right also offers an interesting value proposition for investors who are interested in a long-term opportunity with a strong, dividend-producing stock.

Fundamental and Value Profile

Bridgestone Corporation is engaged in developing, manufacturing and marketing tires and diversified products. The Company operates through two segments: Tires and Diversified Products. The Company’s Tires segment offers tires for passenger cars, trucks, buses, motorcycles, construction and mining vehicles, aircraft, and motor cycles, as well as tubes, wheels and related accessories. The Tires segment also includes the retreading business, and automotive maintenance services. The Company’s Diversified Products segment offers various categories of products, including chemical products, industrial products, automotive components, construction materials, electronic equipment, sporting goods and bicycles. Many of these products are made from rubber or rubber-derived materials. The Company has over 170 manufacturing plants in approximately 30 countries around the world. It sells products in over 150 countries across the world. BRDCY’s current market cap is $29 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings were flat, while sales increased a little more than 4.5%. In the last quarter, however, earnings great a little over 10% while revenues grew almost 6%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable over the long-term. It is also a mark, however of management’s ability to maximize its business operations. BRDCY operates with the highest margin profile of other stocks in the industry, with Net Income over the last twelve months that was 7.9% of Revenues. In the last quarter, that number was only slightly lower, at 7.7% of Revenues.
  • Free Cash Flow: BRDCY’s free cash flow for the twelve months ending 2017 (the most recent information in this case showed about $220 million in Free Cash Flow. This is a number that has decreased in each of the last two years from a high at close to $300 million in 2015.
  • Debt to Equity: BRDCY has a debt/equity ratio of .12. This is a conservative number that reflects a very conservative approach to leverage. The company has excellent liquidity, with a balance sheet that shows more than $5.3 billion in cash and liquid assets versus about $2.4 billion in long-term debt.
  • Dividend: BRDCY pays an annual dividend of $.36 per share, which translates to a yield of 1.86% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BRDCY is $14.46 per share and translates to a Price/Book ratio of 1.33 at the stock’s current price. Their historical Price/Book average is 1.68, which means that the stock is discounted by a little more than 26.3%. That puts the stock’s long-term target price above $24, which is higher than the stock’s 52-week high around $25, reached in early January of this year.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend since the end of January to that trend’s bottom, reached in early September at around $17.50 per share. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock has rallied from that point to its current levels, and is showing some nice short-term bullish momentum right now. The stock’s nearest resistance is at its last pivot high point, which came at the beginning of August at about $20 per share, while resistance is around $18 per share.
  • Near-term Keys: BRDCY is showing the beginnings of a nice, bullish ABC short-term trading pattern, and looks to be building momentum for a decent short-term upward trend. If the stock can break above its closest resistance and get a little above $20, look for the stock to push up to the resistance offered by the 61.8% retracement line above $22 per share. If the stock does break down below support at around $18, it would establish a new 52-week low point that could test its lowest point around $15 since mid-2016.