Mysteries of Universe Solved Thanks to This Hot Japan Stock

When employees at Hamamatsu Photonics KK found out their high-precision light sensors had helped win this year’s Nobel Prize in physics, they treated it just like any other day at the office. 

Far from unusual, it was the fourth time Hamamatsu’s sensors had contributed to projects worthy of the most prestigious award in science. The devices -- used by Takaaki Kajita in his 2015 prize-winning analysis of subatomic particles called neutrinos -- also helped confirm the existence of the Higgs boson, the so-called God particle, in research that led to the 2013 award. 

Akira Hiruma
Akira Hiruma
Photographer: Akio Kon/Bloomberg

“The next day was the same as usual’’ after the prize was announced in October, Akira Hiruma, the president of Hamamatsu, said in an interview at the firm’s headquarters in the Japanese city of the same name. “There was no special celebration.”
 
For Hamamatsu shareholders, there are plenty of reasons to celebrate. Apart from helping to advance our understanding of the universe, the company’s sensors play important roles in everything from X-ray machines to DNA sequencers and pollution monitors. Hamamatsu has a 90 percent global market share in the devices known as photomultipliers and a stock price that’s jumped more than four-fold since early 2009. Equity analysts, meanwhile, are more bullish on the company than at any other time in four years.

With a 538 billion yen ($4.4 billion) market value and a 20-year streak of positive earnings since going public, Hamamatsu is a standout among the hundreds of skilled manufacturers scattered across Asia’s second-largest economy. Like Shimano Inc. for bicycle parts and Minebea Co. for mobile-phone backlights, the company’s reputation for high-quality production has helped it dominate a niche global industry, all from a sleepy Japanese city known more for its tasty eels than as a manufacturing powerhouse.

Nobel Success

Hamamatsu’s route to Nobel success started three decades ago in an abandoned zinc mine 315 kilometers (196 miles) west of Tokyo, where scientists set up an underground laboratory to research cosmic rays, pieces of atoms that rain down on Earth from outer space. 

Photomultiplier tubes
Photomultiplier tubes
Photographer: Akio Kon/Bloomberg

In a set of experiments they called Kamiokande, a complex detector made with about 1,000 of Hamamatsu’s photomultiplier tubes was placed deep in the mountain and filled with thousands of tons of water. It was able to detect cosmic neutrinos, a particularly difficult particle to observe, for the first time in history. The discovery won University of Tokyo scientist Masatoshi Koshiba the Nobel Prize for physics in 2002.

Hamamatsu made more than 11,000 improved sensors for Kajita’s experiments, which began in 1996 and found that neutrinos oscillate and have mass. The 2013 prize was given to Francois Englert and Peter Higgs after the world’s largest particle accelerator used Hamamatsu’s photomultipliers to confirm the existence of the Higgs boson, which gives mass to other particles. The fourth Nobel-winning project to use the company’s sensors was awarded in 2008 for work on a part of subatomic physics called broken symmetry.

Medical, Industrial

Hamamatsu’s photomultipliers, which look like light bulbs and can detect individual photons by converting light signals into electrical ones, account for about 76 percent of the company’s operating income. With sales to academic researchers comprising just 5 percent of the total, a majority of revenue comes from medical and industrial applications.

In X-ray machines, they check the exposure time or dose. Pollution monitors employ them to observe the content of car exhaust fumes. They’re even used in drilling for oil wells to determine the density of the rock.

Demand for photomultipliers has helped Hamamatsu turn a profit every year since it listed shares on the Tokyo stock exchange in 1996, including a record 16.6 billion yen in the 12 months ended September. The company’s operating profit forecast of 23.2 billion yen for this fiscal year “looks conservative and could yield some upside,” according to SMBC Nikko Securities Inc.

Higher Multiple

That kind of performance doesn’t come cheap. Hamamatsu shares are valued at 31 times reported earnings, versus 17 for the Topix index, after outperforming the benchmark gauge by 226 percentage points since the stock began rallying from a low in February 2009 through Monday.  

Analysts say Hamamatsu shares have further to run, with the average of six price targets compiled by Bloomberg signaling an 10 percent gain over the next 12 months. The stock’s recommendation consensus of 4.25, on a scale where 5 denotes unanimous buy ratings, is the highest since July 2011. Hamamatsu rose 0.2 percent in Tokyo on Tuesday, while the Topix slid 1 percent.

Hiruma, for his part, is taking the long view when it comes to boosting his company’s profitability. Unlike some Japan Inc. peers, Hamamatsu is hunting for opportunities to increase returns via more capital spending. Hiruma says he’s interested in research on dark matter, a hitherto invisible part of the universe that he sees as a candidate for future Nobel-winning research.

“We have this word in Hamamatsu, yaramaika,” said Hiruma, 59, a graduate of Rutgers University in the U.S. “It means ‘Let’s do it.’ It’s the spirit of just giving something a go. You can calculate the risk of doing something to some extent. But there’s also the risk of not getting future business opportunities if you don’t.” 

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