Barron’s – June 23, 2016 – Bullish fundamentals and an expanding valuation should help the wireless carrier keep outperforming.
Among companies valued at $20 billion and up, NTT DoCoMo, Japan’s leading wireless carrier, is the country’s best stock-market performer over the past year. Its Tokyo-traded shares (ticker: 9437.JP ) are up 17%, versus a 20% decline for the Nikkei 225 index. The New York-listed American depositary receipts ( DCM ) are up 38%, reflecting a rise in the yen versus the dollar. (Management says it might delist the thinly traded ADRs in 2018.)
Expect more upside from here, as trends contributing to NTT DoCoMo’s recent success continue, and its valuation expands. The Tokyo shares could gain 25% in a year.
During the quarter through March, NTT DoCoMo is the only one of Japan’s three big wireless carriers to add more customers net of cancellations than it did a year earlier, according to JPMorgan analyst Jun Tanabe. The improvement was driven mostly by falling cancellations. That’s a big deal, because NTT DoCoMo in past years had lost market share to two key trends. First, it didn’t start selling Apple’s iPhone until 2013. SoftBank Group ( 9884.JP ) signed an exclusive deal in 2008, and KDDI ( 9433.JP ) signed on in 2011. Second, as the market incumbent, NTT DoCoMo, which is 62% owned by Nippon Telegraph & Telephone ( 9432.JP ), hasn’t been allowed to bundle fixed-line broadband connections with its mobile service, unlike its two rivals.
That changed in 2014 when Nippon Telephone announced it would sell fixed-line broadband service wholesale to wireless carriers. The move has cut into its revenue per broadband user, while also allowing it to reduce marketing costs. More important, it has allowed NTT DoCoMo to bundle broadband service with its wireless plans, thereby improving customer retention. Nippon Telephone’s stake in the wireless carrier is by far its most profitable operation.
In its fiscal year through March, NTT DoCoMo’s operating profit jumped 23% to 783 billion yen ($7.5 billion), far exceeding the company’s guidance of JPY710 billion. This year, management is predicting JPY910 billion. The consensus estimate, which was under JPY800 million at the end of calendar 2015, recently had climbed to nearly JPY928 billion. JPMorgan’s Tanabe is forecasting JPY948 billion, based in part on NTT DoCoMo’s success with selling shared data packs and its launch this month of discounted service for loyal users. Money lost to discounts will be made up for by further improvement in customer retention, he predicts.
Despite NTT DoCoMo’s zippy profit growth, and the fact that its earnings estimates are rising at a time when those for the broad Japanese stock market have been falling, the shares trade at just 15.3 times projected earnings for the next four quarters. That puts them at a slight discount to the Nikkei 225. Tanabe sees shares rising to JPY3,400 by December, which works out to close to 19 times his earnings projection for the current fiscal year ending March 2017. That implies a 25% gain. The dividend yield is close to 3%.
