SMS (TSE:2175) Profit Margin Gain Reinforces Bullish Narrative on Quality and Valuation

SMS (TSE:2175) delivered earnings growth of 9.7% over the last year, outpacing its five-year average annual growth of 7%. Net profit margins improved from 11.5% to 11.8%, and earnings are set to rise another 11.4% annually according to forecasts, outpacing the projected 7.9% rate for the broader JP market. With revenue growth expected to reach 9.7% per year and the stock trading at ¥1,339.5, below some fair value estimates, investors will be watching as profitability and valuation trends highlight SMS’s momentum this earnings season.

See our full analysis for SMS.

The next section puts these results head-to-head with the broader market narrative, to reveal which stories get reinforced and which may need a second look.

Curious how numbers become stories that shape markets? Explore Community Narratives

Margins Expand as Profits Accelerate

• Net profit margins edged up to 11.8% from 11.5%, reflecting not just higher earnings but also improved operational efficiency as SMS captured a larger share of each revenue yen.
• What is surprising is how this margin improvement coexists with strong forecasts for profit growth, with earnings expected to rise 11.4% annually, substantially ahead of Japan’s broader market at 7.9%.
• Such accelerating profit metrics heavily support the argument that SMS’s business model is scaling effectively, with margin gains not coming at the expense of future growth.
• Unlike many competitors whose margins remain flat or compress as sales rise, SMS’s upward trajectory on both fronts signals more sustainable performance, not just a one-off boost.

Profit Quality Stands Out Against Peers

• SMS trades at a price-to-earnings multiple of 14.9x, lower than both its peer average of 16.8x and the JP Professional Services industry average of 15.3x. This valuation highlights perceived quality at a cheaper price.
• Analysts often debate whether a discount relative to peers is justified, but the combination of faster forecast growth and ongoing margin expansion challenges skeptics.
• Critics highlight that such low multiples could be a warning sign about the market’s confidence, yet no major operational flags or risks were identified in recent filings to support this bear case.
• By industry standards, SMS’s higher growth does not come with higher risk, making the relative valuation gap more difficult for bears to defend with current figures.

DCF Fair Value Signals Deep Discount

• The latest share price of ¥1,339.50 sits well below the DCF fair value estimate of ¥3,454.34, pointing to a wide discount that is not mirrored by major flagged risks or weak business metrics.
• Prevailing analysis highlights the tension that, despite robust operational delivery and conservative balance sheet signals, the market has not yet closed the valuation gap.
• With both actual growth and outlooks beating industry trends, investors may view this discount as a sign that market sentiment has not caught up to fundamentals.
• Dividend sustainability concerns remain minor in scope, and recent share price volatility has not undermined the visible business trajectory anchored in margin and revenue growth.
• To see how the current discount stacks up against the long-term view, read the full consensus narrative for SMS.

📊 Read the full SMS Consensus Narrative.

Next Steps

Don't just look at this quarter; the real story is in the long-term trend. We've done an in-depth analysis on SMS's growth and its valuation to see if today's price is a bargain. Add the company to your watchlist or portfolio now so you don't miss the next big move.

See What Else Is Out There

Despite strong earnings expansion and improved margins, sustained share price undervaluation suggests SMS’s momentum is still unrecognized by the broader market.

If you want to uncover opportunities with more visible upside, check out these 848 undervalued stocks based on cash flows to find companies trading below their fair value where sentiment and fundamentals are better aligned.

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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