Japan’s high-tech bathroom fixtures give new meaning to the term “throne room.” TOTO Ltd. (5332.TO) is the world’s largest toilet manufacturer and its Neorest 600 model has a motion sensor that controls the lid’s opening and closing, a wireless remote that can heat the seat and a warm water function that gently cleans one’s nether regions. What price glory? $5,000. Toto’s sales are now surging as Japanese consumers rush to beat the expected increase in the sales/consumption tax to 8% from 5%, likely in April. So what are earnings prospects for this supplier of porcelain furnishings?
Analysts are optimistic for the company’s fiscal year ending in March. There is a positive StarMine Predicted Surprise of 5% for operating profit expectation, which leads our research team to conclude that TOTO may be in line to beat estimates when it reports earnings in April.
Source:Eikon/StarMine
Free-flowing pipes
As seen in the chart above, the StarMine SmartEstimate has remained above the I/B/E/S consensus throughout the last three month period, and each time the consensus moved higher in the direction of the SmartEstimate. The consensus estimate is currently calls for operating profit of ¥41.93 billion, but the SmartEstimate is still higher at ¥44.04 billion. Every estimate revision in the last six months has been higher. In fact, the most recent estimate revision is by a 5-star rated analyst with a record of accuracy. When this analyst has an estimate that is significantly different from the consensus, we call this a Bold Estimate – another indication TOTO will record an earnings beat.
Source:Eikon/StarMine
No drain on assets
The company seems to be operating with increased efficiency as measured by return on net operating assets (RNOA). As seen in the chart above, the industry as a whole has benefitted from a lower consumption tax environment in the last year, but TOTO has really seen its RNOA increase tremendously over the last two years. In the latest quarter, the trailing 4Q RNOA was just over 19%, far above the industry median. Both operating profit margin and net operating asset turnover, the components of RNOA, are higher for TOTO. It’s an indication of strong earnings quality and a good sign going forward.
Source: Eikon/StarMine
Getting a handle on inventory
One quick look at falling inventory days shows that for the last seven consecutive quarters TOTO has been more efficient at managing inventory. In the latest quarter, inventory days were at a two-year low at 61 days. It remains to be seen how much consumers hold back after the April consumption tax hike comes into effect. However, company fundamentals look solid, according to most StarMine models. The fundamentals seem to be aligned with those attractive to institutional investors, based on the strong StarMine SmartHoldings model score of 96. Based on the SmartEstimate, the idea that TOTO will beat earnings estimates looks like it will hold water.
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