{"id":25315,"date":"2023-06-21T03:08:58","date_gmt":"2023-06-21T07:08:58","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/takeda-upside-case-strengthening-looking-to-15x-earnings-nysetak\/"},"modified":"2023-06-21T03:08:59","modified_gmt":"2023-06-21T07:08:59","slug":"takeda-upside-case-strengthening-looking-to-15x-earnings-nysetak","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=25315","title":{"rendered":"Takeda: Upside Case Strengthening, Looking To 15x Earnings (NYSE:TAK)"},"content":{"rendered":"
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Investment Summary<\/h2>\n

Six months on from the reinstated buy thesis, the equity stock of Takeda Pharmaceutical Company Limited (NYSE:TAK<\/span>) has appreciated 10% at the time of writing. I was bullish on the company in December, and it has been a pleasure to see the investment thesis, although slowly, somewhat vindicated.<\/span><\/p>\n

Underlining the medium-term gains are a number of important updates to the critical facts in TAK’s investment debate. The company has faced a set of growth challenges in the last 2-3 quarters, which may have potentially hurt the valuation. Nevertheless, a detailed inspection of the numbers reveals TAK comes to us with desirable economic and fundamental characteristics These position the company to attract a higher market valuation. Net-net, rigorous scrutiny of the company reveals there ample evidence supporting a buy rating. Rate buy $42\/share valuation.<\/p>\n

Figure 1<\/span> <\/h4>\n

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Data: Updata<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Catalysts for further price change<\/h2>\n

As mentioned, the drivers of TAK’s intrinsic valuation, and market valuation, are fundamentally and economically derived. To put things into perspective, TAK was founded in 1781,<\/em> in Japan. It has been operating that long, growing the business every decade or so. You have here a Japanese bastion of a firm that has deep customer networks, cost-relationship advantages and literally centuries of business growth.<\/p>\n

1. Economic catalysts<\/h4>\n

The numbers are still up to scratch in the modern setting, as noted in the example below:<\/p>\n

Table 1. TAK 10-year revenue, operating capital<\/h4>\n

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Data: Author, TAK SEC Filings<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Revenues have compounded 7% per year on average from 2014-2023. Whereas the annual compound rate of growth in operating capital, defined via (1) in Table 1, is 13%, coupled with the 12.3% compounding rate of growth in pre-tax income. That’s a doubling in revenue and more than 210% increase in investments made.<\/p>\n

Such respective compounding growth in income is telling. For one, it tells of TAK’s ability to reinvest its earnings back into additional growth programs, producing growth in free cash flow at high rates of return. You can see in Figure 2 the sources of TAK’s capital charge on a rolling TTM basis. There has been a blend in the usage of capital (blue bars for intangibles, black bars ranging from cash acquisitions, great for CapEx). The line of post-tax earnings underwent tremendous growth from ’14-’20. Since then, the company has generated post-tax earnings in the range of $7.5-$8.5Bn.<\/p>\n

Figure 2<\/h4>\n

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Data: Author, TAK SEC Filings<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Breaking this down on an incremental basis, the following points are relevant:<\/p>\n

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  1. Over the 2019-2023 period, the company invested an additional $55.4Bn in operating capital. This is quite the capital charge in that period.<\/li>\n
  2. At the same time, TAK generated ~$4.8mm in additional post-tax earnings growth from this $55.4Bn investment.<\/li>\n
  3. That equates to an 8.6% return on incremental capital employed.<\/li>\n<\/ol>\n

    Two down years have brought down the overall average ROIC for the company, but the data shows these trends have every right to continue in my estimation. Especially with the growth characteristics discussed below.<\/p>\n

    Figure 3<\/h4>\n

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    Note: Incremental return is the change in NOPAT on incremental capital. (Data: Author, TAK SEC Filings)<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

    2. Fundamental catalysts<\/h4>\n

    Note: As a reminder from earlier, TAK reports in JPY, and thus all figures will be presented here in JPY in order to avoid confusion.<\/em><\/p>\n

    In FY’22, TAK clipped revenue of ~JPY4 trillion, representing core growth of 3.5%. This growth can be primarily attributed to the substantial increase in product sales, mainly from recent launches, which were up 19% YoY. Notably, new launches are ~40% of TAK’s total revenue. It pulled this to core operating profit of c.JPY8.4Bn, a growth rate of 9.1% YoY. This pulled down to operating margin, which increased by 1.6 percentage points on the previous year.<\/p>\n

    Looking at the divisional breakdown, there are many highlights. To name a few:<\/p>\n