Investment Quest
We are in June 2026, AI hypergrowth frontier labs and SpaceX are rushing to IPOs before the hype window closes and we have skyhigh valuation on most AI and space related stocks which are polluting the market and the planet, in a unsustainable way. I am preparing for a harsh winter. So I am actively looking for slow compounders trading at 10-15x PE to protect from PE compression, occupying niche market, with a dominant position limited competition and pricing sustainability as the economical fallout of a bubble bust are unforeseeable. I do expect that even if the business is decoupled from AI or semifab, still second level effect will funnel through and the Company must be able to keep operating margin stable in difficult time. Now this winter may last a lot of longer than I would like so, so I am also looking for compounders with real shareholder yields via buyback and dividends so that I can increase my ownership of the business even without adding new capital.
Legal Disclaimer: All content published on Wintergems is intended for informational and entertainment purposes only. It is not intended to serve as a recommendation to buy or sell any security. The views expressed are my own and are subject to change without notice. The information provided here is proprietary. I make no representations or warranties as to the accuracy or completeness of the information provided and will not be liable for any losses, injuries, or damages from the display or use of this information. Readers are solely responsible for their own investment decisions.
In the quest of finding those cheap compounders, I stumble upon Teikoku. I found this company by looking at the list of certified Japanese manufacturer for nuclear plants. Since Teikoku pumps are used to handles toxic and radioactive liquids in super hot or super cold temperature and high pressure, it is not surprising to find that Teikoku pumps are certified and used in primary or secondary line of the PWR and in the BWR nuclear plants, side by side with Okano Valves. Okano Valve is another low PE compounders with super high margin recurring maintenance revenues but not as friendly in terms of shareholder yields.
A nice view of a standard Teikoku pump:
Teikoku has a 40% market share in the mission critical canned sealless pump market, these are numerous niche markets where the pump must pump toxic or precious liquid with no tolerance for contaminant often operating at extreme temperature or pressure. Teikoku makes them extremely robust with life expectancy of more than 10 years. They do require some maintenance at some point as maintenance and repair represented 26% of total sales. Teikoku has a proprietary monitoring system onboard on all their 700 000 pumps deployed all over the world called Teikoku Rotary Guardian (TRG): It measures induced voltage to continuously monitor radial bearing wear and shaft position without the need to disassemble the pump.
The management is extremely shareholder friendly and has returned more than 100% in the last 3 years in buyback and dividends. Actually it returned 128% of earnings in the last fiscal year using part of its big cash position. It is expected to return at least 100% of net income to shareholder in this fiscal year (ending March 2027) while investing in a brand new cryogenic lab to advance its LNG pump offering for 700m Yen.
Canned Sealless Pump
According to management, canned sealless pump is a niche market and represent only 1% of the overall pump market. It must compete with wet pump in some applications - i.e. pump where motor and pump are not encapsulated together. There is a tradeoff. In the wet pump, the motor is actually not confined or protected thus it is mixed in the open. On one hand canned sealless pump (at least the Teikoku brand) have a much longer life expectancy, 10 years plus, versus wet pumps around 5 years. On the other hand, the wet pumps have higher efficiency. In very high toxic application there is no alternative to canned sealled pump. In cryogenic application I suspect.
If you want to figure out what a canned sealless pump looks like and the benefits the chart can be useful. So leak free, no contact with outside air, support extreme temperature and pressure, no lubricant, light and silent. In a nutshell, the pump and the motor is combined in one enclosure thus the canned label.
In 2004, Teikoku actually bought Chempump, the USA company which is behind most of the development of this type of pump in the 50s, being involved with the US Navy on the development of leak free pump for nuclear submarines. Chempump then reused the technology in other mission critical situation like in the nuclear plants (there are 90 nuclear reactors in USA), aerospace, including refueling rockets before launch but also high toxic fluids in chemical industry as well as oil and gas. Today, USA represents 5.8B of sales or 20%. China is the largest market followed by Japan.
This company is very steady and has compounded revenue by 5% since IPO in 1999 and risen operating margin steadily from 7.5% to 17.5% today.
The Company is expecting sales to grow 6.6% next year after a small decline last year. Note that 1B of last year decline is due to the Company decision to exit from non pump electrical product.
In terms of operating income, Teikoku generated 4.983B Yen in 2026 and is expecting 5.020B in 2027 and EPS of 244 Yen. In 2026, they generated 266 EPS due to a one time gain on LT investment.
Massive buyback in the last 3 years
In the last 3 years, the company has returned about 50% of earnings in dividends and 54% to 78% of earnings in buyback. In 2023, the Company was sitting on 16B of cash- now this has gone down to a still very healthy 11.7B Yen in cash with no debt or about 750yen per share. They did two tender offers in 2024 and 2025 of more than 1 million shares and 1.286m shares respectively.
There is 15.32m shares if treasury stocks are excluded down from 19.69m shares 5 years ago. So 4.4m shares were taking out or around 23%. There is an acceleration in the last 2 years with a promise of more of the same in the subsequent years.
At the same time you get a fat 4.6% dividends - 132 Yen, which can be reused to buy some more shares.
In terms of the market segments, 56% is in the chemical business, followed by refrigerants 7.9% and electric power 2.9%. Parts and repair is at a healthy 26%. The chemical market is pretty broad as you can see in this slide:
One thing I check is that semifabs is not a critical market but still an important market where Teikoku pumps are used to pump high purity water and CMP slurries for wafer processing.
They do sell pumps specifically for the critical and expanding LNG market, thus this year big investment in cryogenic lab.
Teikoku’s cryogenic pumps feature a hermetically sealed, canned motor design. Because they lack dynamic seals or mechanical packings, they eliminate the risk of the highly volatile and flammable LNG leaking into the atmosphere. Cryogenic Construction: These pumps are built entirely of stainless steel and feature specialized bearing journal configurations and circulation flow paths engineered to safely withstand temperatures dropping down to -160 celsius
Honestly, I am still learning more about this company, the chemical business is something I am not yet an expert on, but the 9% shareholder yields at a attractive PE of 12, with very good prospect in the future for growth in a mission critical niche with dominant market share was too good to pass. So I did a Stan Druckenmiller of me and I am building a large position while learning more on the business.
I found one application quite interesting, where Teikoku is collaborating with Mitsubishi Heavy Industries where they were mixing ammonia into coal to produce power while reducing the amount of coal they are using. Teikoku pumps are used to pump the toxic ammonia. Ammonia is also starting to be used in ships using a modified internal combustion engines or used in fuel cells to generate power without emitting CO2.
This chart shows the different pump types based on specific applications
Solid Margin
On aspect that I forgot to mention is that for the pump business the aftersales are high margin in the range of 25-35% operating income. Since the Company has expanded its customer base and as now deployed 700k pumps deployed worldwide it is normal that the aftersales business increase over time and thus the operating margin. Although not disclosed, assuming a 30% operating margin on aftersales, 26% aftersales sales would provide a floor of 8% on operating margin. To achieve 17.5% overall, new sales must bring 12.5% of operating margin which is not the case for many peers.
The following figures shows the operating margin of 4 pump makers:
Ebara: mostly involve in the semiconductor has recently seen a boom in sales and margin rise to 12%.
Graco has very high margin currently at 27%.
Flowserve which is very dependant on oil and gaz has seen margin go back to 13.45% like before the crash in oil in 2013.
Peers
If you compare the 12x PE of Teikoku, with some other compounders in USA such as Flowserve and Graco, and a larger player in Japan like Ebara, these companies trades at twice or 2 and half times the PE ratio of Teikoku:
Flowserve 27x PE
Graco 25x PE
Ebara 30x
Also Teikoku is involved in many niches, so oil and gas is not a critical for Teikoku then for Flowserve or semiconductor for Ebara. Although smaller it is in some way more diversified. You could also look at the EV/EBIT ratio which would be quite attractive if you remove the 12B Yen of cash and add the 900m in depreciation on the numerical, but I prefer to stick to the classic PE ratio. Call me old fashion but a lot of investors are like me. We stick to PE.
Shareholders (updated july4th)
This is not a family led company. VARECS Partners a small boutique investment firm has disclosed last week that they have increased their ownership by a percentage point to 18%.
One shareholder being not satisfied with the current valuation, has asked the Company to start a strategic review. The management and the board rejected the proposal. But what is interesting is the back and forth argumentations. One argument is that the Company is currently aiming for a 70B sales goal by 2035 through the future expansion of the decarbonization market. I do like this grand ambition. As a counter argument, the shareholder is arguing that current factories are already operating at 80-90% capacity. As such a major plant expansion will be required which is costly. The Company has started to act to this effect and recently announce the purchase of a land to build a new plant by 2029.
The management do confirm that Teikoku has a dominant domestic market share in canned sealless pump with more than 60% domestically and 40% worldwide.
The high return ratio to shareholders - more than 100% in the last 3 years was raised as a strong argument in favor of shareholders by the management. I could not agree more.
I hope you found this useful. I will keep digging into these mission critical and specialized market.
Cheers and feel free to chip in in our common understanding in this highly specialized business
Legal Disclaimer: All content published on Wintergems is intended for informational and entertainment purposes only. It is not intended to serve as a recommendation to buy or sell any security. The views expressed are my own and are subject to change without notice. The information provided here is proprietary. I make no representations or warranties as to the accuracy or completeness of the information provided and will not be liable for any losses, injuries, or damages from the display or use of this information. Readers are solely responsible for their own investment decisions.
Interesting find. Thanks for sharing what you’ve learned. The anecdote of the shareholder arguing with the company investing for growth made me smile… some value investors will never be able to hold compounders.
If you like 6333, you might like Tacmina Pump $6322 s well. its in a similar business (special pumps) and very cheap with net cash on the balance sheet. Slow grower and lacks catalyst though. I have a small position in Tacmina pump.