Value Investors Might Want to Forget Visa and Consider This Asian Play

I was supposed to write about Visa (NYSE:V) today. Although year-to-date, the shares have lost 5.75%, V stock is still trading at 31.2 times cash flow, which is higher than its five-year average. 

Value Investors Might Want to Forget V stock and Consider This Asian Play
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Visa’s not the only payment processor trading at a reasonably high valuation. Mastercard’s (NYSE:MA) price-to-sales ratio is 32.8 and PayPal’s (NASDAQ:PYPL) is 33.9. Square’s (NYSE:SQ) is even higher at 63.5

When I last wrote, in April, I suggested that investors could get a better price to buy its stock over the last eight months of the year. At the time it was trading around $174, slightly lower than current prices.

Despite the fact I think Visa is an excellent stock, I still think you’ll be able to get a better buy point at some point in 2020. In the meantime, I came across a Japanese company that value investors ought to consider. 

Here’s why.

I Just Love New Finds

I can’t contain my excitement any longer. The company in question is Orix Corporation (NYSE:IX), a Japanese business that got its start in equipment leasing in 1964, moved into financial services in 1973, and then diversified from there. 

Today, it operates six business segments, including its original leasing businesses, generating $22.7 billion in revenue and $3.07 billion in operating profits. In the nine months ended Dec. 31, 2019, Orix saw revenues decline by 6.2%. However, its income before taxes increased 18.7% over the same period while its cash flow rose by a whopping 88.9%.

Color me intrigued. 

Orix’s American Business

Interestingly, of all six of its business segments, Orix’s overseas business generates the most profits with a 36% profit margin. Business activities conducted by its overseas operations include corporate advisory services, asset management, aircraft leasing, it owns bulk carriers that ship grain, and many other businesses. 

Orix USA was created in 1981. It has more than 1,200 employees in more than 35 offices in the U.S. and Brazil. It manages more than $70 billion in assets including $10 billion for the parent in Japan. Orix USA’s leveraged credit business manages approximately $4.6 billion in assets, including syndicated loans, structured credit investments in eight collateralized loan obligations, and separately managed accounts. It plans to grow this business over the next few years. 

Finding Nice Deals

Orix USA’s Private Equity Solutions unit makes control and non-control equity investments in lower-mid to middle-market companies throughout North America and provides flexible mezzanine capital. Its investments tend to range from $10 million-$20 million per deal.  

An example of a recent transaction by its private equity division, it announced the sale of United PF Partners on March 5. In 2016, Orix invested alongside Eagle Merchant Partners, to acquire 59 Planet Fitness (NYSE:PLNT) franchises. Since then, it’s grown the business to 160 outlets, making it the largest Planet Fitness franchisee in the world.

In February, Orix Growth Capital announced that it made a debt investment in DrChrono, a leading electronic health record company.

“We are excited about DrChrono’s vision for healthcare, where recordkeeping tasks will be easy for both physicians and patients with the aid of a modern platform,” said David Orlandella, managing director at ORIX Growth Capital. “Having a cloud-based platform is part of the future, and DrChrono has developed an ecosystem of extendable apps that can be layered onto the platform, making it a powerful operating system of any medical practice.”

It’s another under-the-radar deal that makes Orix and its U.S. subsidiary so interesting. 

It’s Much Cheaper Than V Stock

According to Morningstar, Orix stock is currently trading at 1.67 times cash flow, less than half its five-year average of 4.47. Currently yielding over 6%, Orix’s stock has an annualized total return of -3.0%, significantly worse than its credit services peers at 14.6%. 

Now, I realize that comparing Orix to Visa is like apples to cue sticks, but I can’t help think it’s worth getting to know a little better. If you’re the type that likes to find diamonds in the rough, as I am, Orix could be such a bargain.

From what I can see it looks like the kind of capital allocation play worth putting on your watchlist.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

 


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