What Are the Profit Growth Prospects of These Companies? — Analysis of Buffett's Investment in Japan's Five Major Trading Houses

In 2020, Warren Buffett invested in Japan's five major trading houses (Mitsubishi Corporation, Itochu Corporation, Mitsui & Co., Sumitomo Corporation, and Marubeni Corporation). These companies focus on trading, resources, and diversified businesses. The question emphasizes that "being cheap alone, without growth, does not make a good investment," aligning with Buffett's investment philosophy: prioritizing sustainable profit growth over mere low valuation. Below is an analysis from the perspectives of profit growth prospects, investment value, and strategy.

Overall Background of the Five Trading Houses and Buffett's Investment Logic

Buffett's Perspective: Through Berkshire Hathaway, Buffett holds approximately 8-9% stakes in these companies, viewing them as businesses with strong "economic moats." These trading houses operate in energy, metals, food, chemicals, and other sectors, benefiting from global trade and resource demand. Buffett highlights their low valuations (P/E typically 5-10x) and high dividend yields (3-5%), but more importantly, their long-term growth potential.
Current Valuations: These companies are indeed "cheap," with average P/B (price-to-book) ratios below 1x, significantly lower than global peers. However, as noted, low valuations must be paired with growth to constitute a quality investment. The focus now shifts to assessing profit growth.

Analysis of Profit Growth Prospects

Based on FY2023 data and 2024–2025 outlooks, the profit growth prospects for these trading houses are optimistic, driven primarily by global economic recovery, energy transition, and diversification strategies. Below is a breakdown:

1. Mitsubishi Corporation

Recent Performance: Net profit grew 15% in FY2023, driven by LNG (liquefied natural gas) and metal resources businesses.
Growth Outlook: EPS (earnings per share) CAGR (compound annual growth rate) is projected at 8-10% for 2024–2026. The company is increasing investments in renewable energy and digital transformation, supported by a strong moat (global resource network). Not just cheap: P/E ~7x, but high growth potential drives attractive returns.
Risks: Commodity price volatility.

2. Itochu Corporation

Recent Performance: Net profit grew 20% in 2023, with strong performance in food and textiles.
Growth Outlook: CAGR projected at 10-12%, benefiting from consumer goods and tech investments (e.g., FamilyMart chain). Buffett favors its diversification and non-resource dependency. P/E ~8x, making it a value + growth investment.
Highlight: Active share buybacks enhance shareholder value.

3. Mitsui & Co.

Recent Performance: Net profit grew 12% in 2023, led by iron ore and energy contributions.
Growth Outlook: CAGR ~7-9%, focusing on green energy (e.g., hydrogen) and infrastructure. Low valuation (P/E 6x) but high earnings stability; ROE (return on equity) expected to remain above 15% for the next five years.
Risks: Geopolitical impacts on resource prices.

4. Sumitomo Corporation

Recent Performance: Net profit grew 10% in 2023, with metals and transportation businesses recovering.
Growth Outlook: CAGR 8-10%, expanding into pharmaceuticals and media via M&A. Not just undervalued: P/E 7x, with growth driven by emerging market expansion.
Highlight: High dividend policy attracts long-term investors.

5. Marubeni Corporation

Recent Performance: Net profit grew 18% in 2023, led by power and grain businesses.
Growth Outlook: CAGR 9-11%, investing in agri-tech and renewable energy. Lowest valuation (P/E 5x) but strong earnings resilience; expected to benefit from global food demand.
Risks: Currency fluctuations (yen depreciation favors exports).

Overall, these trading houses are not stagnant in profit growth: average projected CAGR is 8-10%, exceeding Japan’s market average (~5%). Key drivers include:

Global Trends: Energy transition, supply chain restructuring, and recovering Chinese demand.
Corporate Strategies: Shifting from traditional trading to high-value-added businesses (e.g., digitalization, sustainable investments).
Macro Support: Rising Japanese inflation and a weak yen enhancing export competitiveness.

Investment Value and Strategy Recommendations

More Than Just Cheap: Low valuations are paired with profit growth prospects, meeting Buffett’s "economic moat + reasonable price" criteria. Compared to pure value stocks (e.g., cyclical industries), they offer defensive (diversification) and offensive (growth investment) characteristics.
Potential Returns: Assuming growth materializes, 5-year total returns (dividends + capital appreciation) could reach 15-20% annualized, outperforming market benchmarks.
Risk Considerations: Commodity volatility, geopolitical risks, and Japan’s economic uncertainty. Recommend diversification via ETFs or mirroring Buffett’s stake proportions.
Investment Strategy: Long-term holding (Buffett-style), monitoring quarterly earnings and resource prices. Recent Japanese equity gains (Nikkei 225 hitting record highs in 2024) partially reflect value, but the growth narrative remains intact.

In summary, these companies are not "dead money" investments but value stocks with genuine growth potential. Viewed solely through valuation, they are "cheap"; combined with profit prospects, they represent quality choices. Investors should align decisions with personal risk tolerance and study the latest financial reports.