The Market Still Isn't Giving Itochu Full Credit For Its Self-Improvement

Japanese trading company Itochu (OTCPK:ITOCY) has a tough act to follow - its own meaningful improvement over the past five years. The company was more willing than most of its Japanese trading peers to deemphasize commodity/resource businesses, and it moved fairly quickly here, building up non-resource businesses like its food, “machinery”, and finance operations. Those moves have led to better ROE and cash flow margin performance versus its peers, and Itochu shares have done well relative to peers like Mitsui (OTCPK:MITSY), Mitsubishi (OTCPK:MSBHY), Marubeni (OTCPK:MARUY), and Sumitomo (OTCPK:SSUMY) over that time.

Itochu’s execution has not been flawless, though, and investors are right to worry about the risk of another sizable poor investment (like CITIC (OTCPK:CTPCY)), not to mention the risk of lower long-term returns as Itochu has de-risked its business. I believe its underlying business mix, and the investment priorities that have been demonstrated over the last couple of years, argue for a higher price today, but the upcoming announcement of the company’s next three-year plan could be a significant share mover.

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The Market Still Isn't Giving Itochu Full Credit For Its Self-Improvement

Seeking Alpha: Itochu Management's Unrealistic Goals Look Like A Real Obstacle

For some time now I had been thinking that Itochu (OTCPK:ITOCY) was a good value play on sector (Japanese trading companies) that is often overlooked as hopelessly unwieldy and uncommitted to shareholder value creation. In particular, I liked Itochu for its relatively lower exposure to natural resources (at least compared to Mitsui, Marubeni, and Mitsubishi) and its determination to pursue leadership positions in textiles, manufacturing, retailing, and food, with a particular focus on China.

This looks like I case where I should have gone with the conventional wisdom. While Itochu is indeed one of the most China-leveraged Japanese trading companies, I am concerned about the declines in earnings quality, management's strategic investment decisions, and their apparently unrealistic views concerning many aspects of the business. While the local shares have been quite strong over the past year (up more than 30%; while currency has reduced the gains to ADR shareholders to below 10%), and there is upside if Itochu can consistently deliver double-digit ROEs, I think it is time to call it a day with a company where I just can't share management's views on the best path forward.

Read the full article at Seeking Alpha:
Itochu Management's Unrealistic Goals Look Like A Real Obstacle

Investopedia: Peabody Tries Again To Get Macarthur Coal

Give credit where credit is due - Peabody Energy (NYSE:BTU) does not give up easily when management sees a valuable asset that could improve its business. In this case, the company is trying again to acquire Australian metallurgical coal miner Macarthur Coal (OTCBB:MACDY). While the price that Peabody is offering is a little high, it is not too out of line with recent deals, and the operating leverage that Peabody has should allow the company to make a decent return even at these levels. 


A New Bid for an Old Target
Peabody has been interested in Macarthur Coal and its 175 million tons of attributable coal reserves for some time now. About a year ago, Peabody bid A$15 a share for the company, but ultimately found rejection from the target's board (and its large shareholders).

Now Peabody is trying again, but this time it's bringing a buddy. ArcelorMittal (NYSE:MT) already owns about 16% of Macarthur and was previously not in favor of selling out to Peabody. Now Peabody wants the company to be a partner, and the companies have launched a joint 60/40 bid for the company with Peabody as the projected controlling partner.


The link below leads to the full piece:
http://stocks.investopedia.com/stock-analysis/2011/Peabody-Tries-Again-To-Get-Macarthur-Coal-BTU-MACDY-MT-PKX-XSRAY-VALE-TCK-WLT-ACI-PVR0712.aspx