Subaru: spoiler alert

An Impreza made by Subaru was once the apple of every boy racer’s eye, adorned with pointless spoilers and blue neon underlighting. Today the Japanese carmaker focuses on the American hockey Dad. Its cars will not even rev up for the Japan leg of the World Rally Championship next year. Subaru has not raced for a decade, but that has not stopped it driving the share price off a cliff. At present it is priced for the junk heap.

The company is partaking of Japan-wide soul searching over falling quality standards. A problem with an engine part will require a laborious replacement costing over ¥110,000 ($1,000) per car affected. Reports suggest around 400,000 vehicles worldwide will be recalled. To make matters worse, on Monday, the carmaker revealed some quality inspection problems at one of its plants. It revised down its full-year profit guidance, announced just a month ago, by 10 per cent to ¥55bn. The shares fell 5 per cent.

One might expect bargain hunters to steer a path toward Subaru. The company’s enterprise value is less than three times forward ebitda, a cash earnings measure. That is the lowest ratio in at least 20 years. But the group’s financial position, even with extra expenses from recalls, looks very sound. Subaru has a net cash position, and analysts expect at least ¥200bn of free cash flow annually. Dividends, providing shareholders a 5 per cent yield, should thus be well covered. What’s not to like?

For all its strengths, Subaru will need to invest more to prepare for the future. All conventional carmakers face disruption from the shift to electric vehicles. Toyota, Nissan, Honda and Mitsubishi Motors all offer several electric alternatives. Subaru fields only one model, the Crosstrek, and it does not sell that in its largest market, the US. Nearly two-thirds of its sales are there. In past years the company has generated returns on invested capital around double its cost of capital. But that has tailed off. Indeed, its product problems hint at under-investment, thinks Macquarie.

Subaru could well reverse out of its mess in the year to come. But it remains one of the smallest carmakers in Japan. Rival Mitsubishi revitalised its profits after partnering with Nissan in 2016. Subaru will need to do more with Toyota, which owns a minority stake. A company that once burnt rubber is now burning value.