Is Sankyo (TSE:6417) Undervalued After Its FTSE All World Index Exit?

Sankyo (TSE:6417) has been removed from the FTSE All-World Index (USD), a global benchmark followed by many index-tracking funds. The change is raising fresh questions about how investors may now approach the stock.

The index exit comes at a time when Sankyo’s share price has been moving in two directions at once in investors’ minds. Over shorter windows, momentum has been building, with a 30 day share price return of 4.87% and a 90 day move of 33.08% from the latest close of ¥2,120. Over a longer horizon, total shareholder return has been weaker, with the year to date share price down 16.45% and the 1 year total shareholder return declining 14.55%. This is in contrast to the 3 year and 5 year total shareholder returns of 73.62% and roughly 3.6x respectively, which point to a very strong earlier run that the recent index removal could now put under closer scrutiny.

Scan how traders are reacting to Sankyo’s index exit by comparing it with 19 high quality undervalued stocks that screens for strong fundamentals and potential mispricing after sharp sentiment shifts.

Sankyo has just been pushed out of a global index after a powerful multi year run and a sharp 90 day rebound. Is most of the share price gain already behind it, or is there still clear upside on offer when you look at valuation next?

Price-to-Earnings of 11.2x for Sankyo: Is it justified?

Sankyo currently trades on a P/E of 11.2x, which sits below several valuation reference points and raises questions about how the market is pricing its earnings power.

The P/E ratio compares what investors are paying today for each unit of profit. For a business like Sankyo that is already profitable and has a long operating history in Japan’s leisure equipment market, earnings based metrics often carry more weight than pure revenue based measures.

Analysts who cover the stock see earnings growing at 3.67% per year, which is slower than both the wider JP market and the Leisure industry forecasts. That slower outlook can help explain why the multiple is not higher. Even so, the stock is described as trading at what some view as good value relative to peers and sector averages, and the estimated fair P/E of 14.8x sits above the current 11.2x level. This indicates a discount between the current multiple and that fair value estimate.

Against the JP Leisure industry average P/E of 16.3x and a peer group around 18.1x, Sankyo’s 11.2x valuation is lower. The gap to the 14.8x fair ratio estimate is also meaningful, which suggests investors are pricing the earnings profile more cautiously than both the industry and the fair value model.

Explore the SWS fair ratio for Sankyo.

Result: Price-to-Earnings of 11.2x (UNDERVALUED)

Still, the recent FTSE All-World removal and analyst price target, now sitting below Sankyo’s last close, both flag clear downside risk if sentiment turns.

Find out about the key risks to this Sankyo narrative.

Another View on Sankyo’s Value

The P/E work paints Sankyo as modestly priced. A different tool tells a much stronger story. The SWS DCF model estimates the future cash flow value at ¥5,009.88 per share, which is far above the current ¥2,120 level and points to a heavily undervalued stock. If both methods are right, what exactly is the market worried about?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Sankyo for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 19 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Sentiment on Sankyo is clearly mixed right now, with both caution and optimism in the air. Consider acting promptly, review the numbers yourself and weigh up the 3 key rewards and 1 important warning sign

Looking for more ideas beyond Sankyo?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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