Hamamatsu Photonics (6965) Part 1
Shining bright at 10x EV/EBIT
Why is this interesting?
Hamamatsu Photonics is a Japanese maker of optical components. The company’s product portfolio includes a wide range of optical sensors, sensor modules, light sources, scientific cameras, photonics-based inspection systems, and other products that are based on “light science”. The company focuses on advanced applications, including medical imaging and diagnostics, semiconductor production and testing, industrial inspection and robotics, scientific instruments, and academic research.
Hamamatsu is a global leader and, in my view, one of Japan’s best-kept secrets in the large-cap hardware/components universe. Yet, it remains lesser known and underappreciated by investors.
Today, you can buy this global leader in photonics technology for less than $5 billion in market cap, at 16x forward P/E or 10x EV/EBIT—a true bargain considering the long-term growth potential for photonics in many key fields moving forward, which will be discussed in this write-up.
The cheapness of Hamamatsu stands out even more when you consider that most of its peers in the Japanese large-cap components space trade at 30-40x P/E, which includes names like Murata, TDK, and Kyocera. I would argue that Hamamatsu faces less competition, targets higher quality end-markets, and its exposure to photonics should command a premium valuation. We should not be able to buy the stock for so cheap!
Hence, I am putting my money where my mouth is, having accumulated a large weight for my personal portfolio at around ¥4,300 per share (it’s now the second-largest position in my portfolio). However, this is NOT investment advice.
In Part 1 of this two-part write-up, I will discuss Hamamatsu’s product portfolio and end markets, and provide an overview of the technology and applications. Part 2 will dive deeper into the business model and competitive advantages, growth drivers/optionalities, management, and valuation.
Why does the opportunity exist?
Shares of Hamamatsu Photonics have declined by 40% since peaking in May 2023. Cyclical weakness in customer orders led management to reduce the company’s sales and profit guidance by 6% and 22%, respectively, for the current fiscal year ending September.
Several factors have contributed to this. Sales of radiographic equipment (X-ray, PET scanners, etc.), which is one of Hamamatsu’s largest end-market segments, have slumped. Equipment makers oversold during Covid due to a high demand for health screenings. In addition, hospitals and dental clinics have been delaying equipment capex in the face of the current high-interest rate environment. Another factor is that during Covid, customers hoarded critical components made by Hamamatsu, such as PMTs (where Hamamatsu holds a 90% global share), resulting in elevated customer inventory levels which has suppressed new orders.
Last quarter, management noted that their shipments are now substantially below demand levels across the various end-markets, with customer inventory steadily declining. Based on conversations with customers, management anticipates this year will mark the bottom, with shipments resuming growth from 2025.
Looking beyond the current inventory cycle, the long-term outlook is highly positive.
Photonics is a highly promising area with many opportunities for adoption across multiple fields. One can say that a firm with photonics technology today is akin to a firm with electron technology post-World War II. Advancements in many fields, from semiconductors and EV/self-driving technology to quantum computing and cutting-edge medical research, rely on photonics. Hamamatsu provides the essential "building blocks" for companies operating in these areas.
Another notable change is in management. Since the stepping down and passing of its long-time founder, Hiruma Sr., in 2018, the company has undergone a management transition. The new management team is more growth-oriented and willing to take risks, marking a departure from the company’s highly conservative past. So far, the new management has done a great job filling in the “missing pieces” of the product portfolio, which includes bolstering the lineup of light sources and expanding its business dealings with the semiconductor industry.
Under the new management, Hamamatsu has also become more shareholder-friendly and willing to engage with the capital market. The company is committed to sensible shareholder return policies to enhance value. Recently, it demonstrated this commitment by announcing a 10 bn yen share repurchase, at approximately 4,300 yen per share, taking advantage of the declining share price.
Hamamatsu Photonics 101
“Light has infinite possibilities, so I believe that industries utilizing photonics will continue to expand”
– Tadashi Maruno, President of Hamamatsu Photonics