(1) Mizuho Securities raised its target by 9% to ¥48,000 ($48.58 ADR equiv. at ¥123.5/$1)
(2) The yen is trading at a multi-year low against the US$ and an all-time low against the euro.
Nintendo's ADRs (NTDOY.PK) trading on the pink sheets rose 0.7% to $42.90 on Friday.
Note a third factor helping Nintendo is broad strength among exporters and domestic plays. The Nikkei 225 is not far from its multi-year high set in late February.
Nintendo continues to please both investors (see the chart below) and fans, based on third-party monthly estimates of robust Wii and DS hardware/software sales consistently exceeding rival Sony (JP: 6758) (SNE).
Meanwhile, many analysts are raising their price target estimates. The highest I'm aware of is ¥50,000 ($50.61 at ¥123.5/$1) by Macquarie Securities, issued in early April, around the same time Nikko-Citi downgraded it to "2H" from "1H." In a subsequent report earlier this month, Nikko-Citi maintained its rating with a target of $43 (approx. ¥42,500 ordinary equiv. at the current exchange rate.)
Aside from its strong sales (and expectations of sustained strength), there are three reasons to like Nintendo at its current price, despite it trading above 30x trailing and forward earnings (which I don't see as necessarily excessive) and the possibility of a pullback as much as about 10% on profit-taking (as has happened in the past).
- I. The yen currently at ~123.5 against the dollar, is much weaker than Nintendo forecast (¥115/$1). Its ¥/€ forecast of 150 is about 10% lower than the current rate of ~165.6. I previously calculated a forward P/E around 28, if it were merely to breakeven in terms of forex impact, instead of its forecast ¥20b loss.
II. What will really take Nintendo to ¥45,000 and higher is the announcement of a stock split, which I think will happen this calendar year, with per share pricing somewhere along the lines of its ADRs, which trade at an 8:1 ratio.
In addition, I see Nintendo moving from the pink sheets to either the NYSE or Nasdaq -- most likely the NYSE. There will be strong demand from both retail and institutional investors on both sides of the Pacific as Nintendo's shares will be more affordable (when considering 100 lot purchases; although there is a "mini-stock" purchase system) for the Japanese and have more liquidity for Americans.
III. Nintendo has to upward revise its guidance, which historically is quite conservative (but perhaps understandably so) given the number of previous revisions, based if not on strong sales, then at least on the positive impact of forex.
I still believe the yen carry trade will not unwind in the near-term. I also don't expect a significant movement this calendar year, since a 0.75% or 1.0% BoJ target still leaves a wide rate spread and the benefits of considerably higher overseas yields outweigh forex losses.
At this point there is about a 7% difference in the current ¥/$ rate and Nintendo's forecast. I'd be very surprised if the yen were to strengthen and hold more than 5%. Similar to "I." above, Nintendo's forward P/E will become more attractive as it revises its guidance, prompting more buying of its shares.
Note ADR investors will not enjoy in all the upside, assuming its shares climb towards 45,000 and maybe even to Macquarie's target, as long as the yen stays weak against the dollar. Any strengthening of the yen is welcomed of course given the positive impact on ADRs, but too much, too fast, could prompt selling and may spark one of those bigger pullbacks on broader profit-taking.
In closing, don't forget Nintendo is sitting on close to $6b in cash and equivalents per its FY-end earnings release in late April. I don't expect much, if any, action in terms of share repurchases, because Nintendo is aiming to increase its number of shareholders. Also, with such a large cash position (and high cap rate) and no long-term debt, it could easily be a target of activist funds (though realistically, I think it would be unlikely).
However, I would expect Nintendo to keep returning cash via dividends. It already has a pretty high dividend for a Japanese company, at 1.6% and not bad compared to the ~1.9% yield on JGBs. Interestingly, with a payout ratio already around 50%, it seems it may have to issue special dividends, because pushing the payout ratio too high may prove unsustainable in the future.
Nintendo (NTDOY.PK) 1-year chart:
Disclosure: The author does not own shares of any companies mentioned in this article.
