Why Did Nippon Kayaku (TSE:4272) Stock Drop Today?

Nippon Kayaku (TSE:4272) has been removed from the FTSE All-World Index (USD). This change can prompt index funds and institutional portfolios to reassess their exposure to the stock.

Recent trading shows that momentum in Nippon Kayaku has cooled in the very short term, with the share price down 2.2% over the past day and 2.2% over the past week. This comes even as the year-to-date share price return of 24.0% and 1-year total shareholder return of 57.0% point to a stronger underlying trend, which may now be reacting to the index removal as investors reassess risk and future potential.

Compare the recent index-driven move in Nippon Kayaku with other stocks that combine resilient balance sheets and fundamentals using our curated list of solid balance sheet and fundamentals (23 results)

The FTSE exit, the recent pullback and a value score of 3 now put Nippon Kayaku in a different light. Does the current valuation still leave enough upside to justify the risk?

Preferred P/E of 11.9x for Nippon Kayaku: Is it justified?

Nippon Kayaku trades on a P/E of 11.9x, which lines up with a share price of ¥2,083 and suggests the market is pricing the stock below several reference points.

The P/E ratio compares what investors pay for each unit of current earnings. For a chemicals group like Nippon Kayaku, which generates ¥254,495.0m in revenue and ¥26,430.0m in net income, this measure helps you weigh the earnings profile against other listed businesses in the same space.

At 11.9x, the multiple sits below the JP market average P/E of 13.9x and below the JP Chemicals industry average of 12.8x, so the stock trades at a lower earnings tag than many domestic peers. It is also beneath the estimated fair P/E of 12.4x. This is a level the valuation work suggests the market could move toward if conditions justify a re-rating.

Result: Price-to-earnings of 11.9x (UNDERVALUED).

Explore the SWS fair ratio for Nippon Kayaku.

Still, Nippon Kayaku faces pressure from its FTSE index removal and a decline in annual net income growth, both of which could challenge any case for a re-rating.

Find out about the key risks to this Nippon Kayaku narrative.

Another view on Nippon Kayaku’s valuation

Nippon Kayaku looks inexpensive on its 11.9x P/E, yet the SWS DCF model points the other way. On that framework, the estimated future cash flow value is ¥647.74 per share compared with a market price around ¥2,083, which signals a rich valuation rather than a bargain.

Two models, two very different answers. If the DCF output is right, you are paying a heavy premium and need strong conviction about the business to justify it, so which yardstick do you trust when the numbers pull you in opposite directions?

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 Nippon Kayaku 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 17 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

Mixed signals on Nippon Kayaku so far, or a clear message taking shape? Step in quickly, check the full data set for yourself, and weigh both the concerns and the bright spots with the help of 3 key rewards and 3 important warning signs

Looking for more Nippon Kayaku sized opportunities?

If Nippon Kayaku has sharpened your focus on valuation and risk, do not stop here. The next idea you research could change your portfolio mix.

• Target potential underpriced quality by scanning companies with strong fundamentals and compelling valuations through the 17 high quality undervalued stocks.
• Strengthen your income stream by reviewing companies with higher yields and robust payout profiles using the 19 dividend fortresses.
• Protect your downside by filtering for financially resilient businesses that score well on balance sheet strength with the 21 resilient stocks with low risk scores.

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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