Idemitsu Kosan (TSE:5019): Revisiting Valuation After U.S. AI Data Center Natural Gas Deal, Upbeat Earnings, and Buyback

Idemitsu KosanLtd (TSE:5019) just made headlines with its strategic alliance with Overwatch Capital, launching natural gas supply operations for AI-focused data centers across the U.S. This announcement comes as the company also boosts its earnings forecast and initiates a substantial share buyback plan.

See our latest analysis for Idemitsu KosanLtd.

The strong run in Idemitsu Kosan Ltd’s stock lately reflects real underlying momentum. Fuelled by upbeat earnings guidance and this big strategic step into U.S. natural gas, its 30-day share price return stands at 9.6%, while the one-year total shareholder return has climbed an impressive 15%. Long-term holders have seen a standout 101% total return over three years and 215% over five, underscoring growing optimism around both earnings power and capital returns.

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With the stock trading near recent highs and multiple catalysts now public, the key question is whether the market has fully priced in Idemitsu Kosan Ltd’s new growth story or if there is still value to be unlocked for investors.

Price-to-Earnings of 34.5x: Is it justified?

Idemitsu Kosan Ltd is currently trading at a price-to-earnings ratio of 34.5x, much higher than both its industry peers and the broader market. At the last closing price of ¥1,146.5, the stock appears significantly expensive relative to typical oil and gas sector valuations.

The price-to-earnings (P/E) ratio measures how much investors are willing to pay for each yen of the company’s earnings. For a mature and stable industry like oil and gas, especially considering Idemitsu Kosan Ltd’s established business model, this metric is closely watched to gauge investor expectations for future earnings growth.

In the current context, the company’s high P/E implies the market is pricing in strong future growth or a successful strategic shift despite recent profit margin compression and challenging sector headwinds. Compared to the Asian oil and gas peer average of 13.2x and a fair value P/E of 22x, the current ratio looks stretched. This indicates that investors are paying a premium well above what fundamentals or sector norms might warrant. If the market reverts to those lower multiples, there could be a meaningful future repricing.

Explore the SWS fair ratio for Idemitsu KosanLtd

Result: Price-to-Earnings of 34.5x (OVERVALUED)

However, slowing annual revenue growth and the stock's current discount to analyst price targets could present challenges to the optimism driving Idemitsu Kosan Ltd’s valuation.

Find out about the key risks to this Idemitsu KosanLtd narrative.

Another View: SWS DCF Model Suggests Undervaluation

Looking from another angle, our DCF model points to a different outcome. It estimates Idemitsu Kosan Ltd’s fair value to be ¥1,416.82, almost 19% above the current price. While the market may view the shares as expensive based on earnings multiples, the DCF suggests there could still be meaningful upside. Which perspective better reflects reality?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Idemitsu KosanLtd for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 923 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Idemitsu KosanLtd Narrative

If you have a different view or want to dig deeper into the numbers yourself, you can build your own story in just a few minutes. Do it your way.

A great starting point for your Idemitsu KosanLtd research is our analysis highlighting 2 key rewards and 4 important warning signs that could impact your investment decision.

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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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