Shares of Japan’s five major trading houses—a particular favorite of investor Warren Buffett—are undervalued by more than 20%, according to Morningstar senior analyst Michael Makdad, who recently began covering the stocks. These companies—Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo—are diversified multi-sector conglomerates engaged in industrial metals, oil and gas, food and agriculture, automotive supply chains, infrastructure, real estate, finance and leasing, industrial equipment, chemicals, media, digital, consumer, and healthcare businesses.
Japanese Trading Houses Are Cheap
Warren Buffett’s Stake in Japanese Trading Houses
Buffett has been building stakes in these companies. He likes them for their increasingly shareholder-friendly policies of dividend boosts and stock buybacks, their cheapness, and the margin of safety granted by cheap yen borrowings.
A key reason they’re undervalued is that earnings are heavily exposed to commodity prices, while “their complex, diversified structures can obscure valuation and contribute to conglomerate discounts,” writes Makdad. “We forecast all five to earn a return on invested capital above its weighted average cost of capital over the next five years,” he continues. In addition, “our fair value estimates imply the shares are moderately undervalued despite High Uncertainty Ratings. Mitsui and Marubeni have the most upside to our fair value estimates.”
The conglomerates play a critical role for resource-scarce Japan by providing hard and soft commodities, including iron ore, steelmaking coal, copper, liquified natural gas, meat, and seafood. They also do industrial goods trading and have expanded into downstream consumer-facing segments. For example, Itochu has a stake in Descente, which makes Chinese premium sportswear.
One new positive that Makdad doesn’t mention is the finalized trade agreement between Japan and the United States, which reduces the tariff rate to 15% from a proposed 25%. That includes automobiles, which were at 25%.
Narrow Moat Rating for Itochu
While Mitsui and Marubeni are cheapest, Makdad notes that “only Itochu is expected to be more likely to maintain excess returns for at least 10 years with moderate or lower risk of value destruction.”
Itochu earns a narrow moat and derives the majority of its profits from non-resource businesses, including food wholesale, convenience retail, apparel, and industrial equipment. Says Makdad: “This business mix supports relatively stable earnings through the cycle and reduces reliance on volatile upstream sectors such as energy and metals. Itochu’s approach is characterized by pragmatism, discipline, and a strong focus on capital efficiency. While all Japanese sogo shosha, or trading houses, operate diversified portfolios, Itochu has been the most selective in allocating capital toward businesses with high returns on invested capital and clearer paths to differentiation.”
