Sumitomo Rubber Industries, Ltd. (5110.T) fair value

ACCE thesis

Sumitomo Rubber makes passenger, light truck and performance tyres under the Dunlop brand in Japan, the Americas, Europe and Asia, and supplies original-equipment tyres to automakers as well as replacement tyres through its distribution network. Its edge is a large, globally spread brand and production footprint in a replacement-driven category where aftermarket demand is steady and less exposed to new-car cycles. Revenue growth of 11.7% is the most visible sign of momentum, with the company's push into higher-value premium and performance tyres and its ongoing restructuring of its plant network the main levers behind any margin recovery. At 8.4 times trailing earnings and 10.5 times forward, the stock prices in little improvement, while a 7.3% operating margin and 9.0% return on equity leave room to earn more from the same sales base if mix and cost discipline hold. The case is worth a deeper look mainly to test whether revenue growth is converting into profit, since a 31.6% gross margin against a 7.3% operating margin shows how much of the gross profit is absorbed by operating costs.