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Play the Tape for Growth & Income

September 03, 2020

Remember mix tapes?

Cassette tapes were a big deal decades ago. I remember as a kid in the 1960s when my parents had cassette recorders. The fidelity quickly improved, both with the higher quality tape and ferrous metal. And unlike vinyl records, tapes were portable.

Philips (PHG) is credited with the early tapes, but it was Tokyo Denki Kagaku Kogyo, or TDK Corp. (TTDKY), that made cassette tapes and lots of other music and data storage systems really work on a whole new level.

But while the company’s name is linked to tapes, it has always been a company of change. It moved early to develop CDs and DVDs and then, as those became commonplace, sold its interests and moved on to silicon chip capacitors and inductors that enabled a chip to take in electric currents to accept and transmit instruction and data.

It also developed digital solid-state data storage along with the chip products. And again, as the market commoditized these, it sold the division and moved on. Its focus now is all about electric power and how best to harness it.

This is why the growth of the newest innovations depend upon TDK right now.

Power to the People

Now, think about some of the most engaging new technologies right now. For example, not a day goes by when I don’t see or read a bevy of stories about fifth-generation (5G) wireless.

TDK has mission-critical 5G technology in its power management and power supply products. Each antenna has to have power management that takes wired alternating current (AC) and makes it work with DC powered electronics. The capacitors and inductors that TDK has developed are considered the best in the business.

Smartphones need batteries that quickly charge, evenly power and don’t overheat and explode. TDK is one of the leading battery-makers for these devices. And it also provides the voltage temperature management and sensor devices so that your pants don’t catch fire. Phone sales as 5G begins to roll out are creating a surge in demand for TDK products.

Beyond 5G, electric cars and autonomous cars are other technologies that get daily attention. Every automaker has electric cars now or in development. And what they all have in common are TDK products.

Capacitors and inductors receive, store and transmit the power that makes all of these products move and stop. And those voltage monitors that keep phones from exploding are even more critical for cars.

What also makes electric (and hybrid) cars move are magnets. TDK has developed the go-to magnets. And storing that power takes lots of batteries. Again, TDK is a big leader here.

While lithium and lead remain the go-to batteries, solid-state batteries are what’s going to really solve the recharging challenge for electric vehicles, not to mention holding power more efficiently and not creating massive environmental devastation.

There are all sorts of sensors on cars that are part of the autonomous developments, and TDK holds the patents on a lot of them and continues to sell more of them, including its acceleration sensors and gyro sensors that keep cars in the loop in terms of where they are and where they’re moving.

Revenue from its myriad must-have technological goods continues to rise, with the past decade showing a consistent climb at a compounded annual growth rate (CAGR) of 4.3%. Margins vary across its highly diverse collection of products. But overall operating margins are good at 7.2%. In turn, that works to deliver a return on equity that compares well with Japanese peers at 6.6%.

TTDKY Total Return—Source: Bloomberg Finance, L.P.

The company has plenty of cash with current liabilities covered by 130%. And debts are minimal at only 23.7% of assets. This provides the ability to borrow if needed to invest in new areas. But given the revenues and an earnings retention rate of 60.6%, it has been highly successful at self-funding its pipeline of innovations.

It also pays its shareholders a solid yield of 1.4%.

The real attraction beyond all of its components and systems is that the stock is valued at close to the amount of revenue produced over the trailing year, with the price to sales at 1.1 times. And its intrinsic value is priced in the stock market at only 1.68 times book. This is a bargain stock for what’s under the hood.

The shares have returned 81.9% over the past decade for an average annual equivalent of 12.7%. But not without some ups and downs. I see that there are a lot more ups coming as folks learn more about what TDK Corp. (TTDKY) is and not what it was decades ago.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life