Wednesday, October 30, 2019

HOYA Corporation (HOCPY, $84.53): “HOYA on a High” By: Luke Smrek, AIM Student at Marquette University


 HOYA Corporation (HOCPY, $84.53): “HOYA on a High”
By: Luke Smrek, AIM Student at Marquette University




Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

HOYA Corporation (OTC: HOCPY) engages in the manufacture and sale of imaging and optical products, electronics, and medical-related equipment through two main segments: Life Care and Information Technology. The company makes electro-optical components used in high-tech and medical products. The company was founded in 1941 and is headquartered in Tokyo, Japan.

In July 2019 HOYA received authorization by Amakusa City in Kunamoto Prefecture, for a scotopic vision eyeglass-type wearable device which assists individuals who have difficulty seeing in dark places due to nyctalopia. HOYA aims to expand this to other local governments in Japan.

• For the first quarter ended July 30, 2019, net profit has increased by 6% compared to the first quarter in 2018. Profit from ordinary operating activities increased by 9% compared to 2018 mainly due to decreasing expenses and increasing net profit in the IT segment driven by mask and blank sales.

• Contact lenses have proved to be a large driver in the Life Care segment with sales growing from new customers and unit price increases. With the acquiring of a retailer in the Chugoku region, HOYA looks to continue with their strong performance with contact lenses. Eyeglass lenses struggled with capacity constraints and a result sales only grew by 1%. A second factory in Vietnam is set to go online in November and mainly target mass merchants in North America.

HOYA Corporation is a market leader in eye glass and optical products and is poised to continue being in a unique position in the industry as healthcare begins to collaborate with technology. Healthcare innovation is being driven by rapidly developing technology within the industry to take patient care to a higher level.

Key points: 

Organic growth for the first quarter in the Life Care segment grew by 3%. It was led by an increase in contact lenses which saw a 7% YoY sales growth and intraocular lenses with 5%. Growth in the Life Care segment is expected to be driven by M&A’s in IOL’s and continued growth of contact lenses.

Masks and blanks have been a large driver in the IT segment the last few months with 22% YoY sales growth. Blanks were driven by 7nm tape-outs and EUV sales doubled to account for 29% of total blank sales. Mask sales were strong in the first quarter particularly in China, and going forward high growth is expected in the Chinese market due to the expansion in the external mask shop market.

For the year 2019, expected annual growth in earnings is 8.0% which is well below the industry average for medical equipment of 23.1%. HOYA’s revenue growth is expected to be 5.1% for the year which is below the industry average of 7.9%. While these metrics may show HOYA underperforming relative to the industry in the future, HOYA is a mature large cap company that consistently has around the same earnings growth each year so these metrics should not be worrying.

HOYA has efficiently used shareholders’ funds in the last year with a return on equity of 20.2% which is well above the industry average of 9.8%. The company will look to continue improving on this by increasing their high operating margins on sales, specifically by reducing operating expenses.

What has the stock done lately?

The AIM international equity fund purchased HOYA on March 4th, 2019, at a price of $64.72 and since then it has risen to a high of $85.80 on September 9th, 2019. The stock is currently at $84.53 which is 1.48% below the high. Since the initial date of purchase, the stock has increased by 30.60% to its current price. Similarly, over the last three months HOYA has seen an increase in price by 12.16%. The company will look to continue their strong performance over the next few quarters.

Past Year Performance: 

HOYA’s stock price has increased in the last year by 49.31%. Recent performance in earnings and revenue indicate that the rest of 2019 will continue to be a strong year. Shareholder return over the last year was 53.7% which is well above the U.S medical equipment industry return of 15.6%. These figures show that future cash flows for 2019 will continue to increase.


Source: FactSet

My Takeaway

HOYA has performed extremely well over the last year and since the initial purchase. They are increasing their high margins and focusing on increasing production capacity to generate even higher sales and get access to new markets. Management has successfully continued to meet earnings each quarter with new targets and goals being put in place to continue grabbing market share. Organic growth has been in the mid-to-high singles digits the last quarter and in the last few years, showing overall stability and the ability to meet earnings. With healthcare innovation relying more on technology, HOYA should continue with their strategic decisions that have been allowing the company to grow at a fast pace and take strides in the industry.


Source: FactSet