By Paul R. La Monica

Toto Ltd., a Japanese maker of toilets, bidets and other bathroom fixtures, has suddenly become a hot stock. The company's Tokyo-listed shares are up more than 40% this year. Why? You guessed it. It's now viewed as an artificial intelligence play.

But before you start cracking scatological jokes about smart poop, it's important to note that the reason Toto is getting an AI boost actually has nothing to do with its bathroom thrones. The company also makes advanced ceramics used by semiconductor equipment manufacturers, a lucrative business that one big shareholder wants Toto to focus even more on going forward. Lam Research is a top Toto customer.

London-based Palliser Capital, which says it is a top-20 shareholder in Toto, issued a report earlier this week detailing how the company could boost value for investors by doubling down on the ceramics business.

The report, titled "Maximizing the Value of TOTO -- The Most Undervalued and Overlooked AI Memory Beneficiary," describes how Toto could do a better job by "transforming from sanitary excellence to semiconductor material innovator."

Palliser points out that Toto's production of electrostatic chucks, ceramic components used by chip equipment companies for etching semiconductor wafers, is a highly profitable business, generating operating profit margins of 40.6% and a return on assets of 34.2%. That is higher than comparable figures for rivals such as Shinko, NGK, Sumitomo Osaka and Niterra.

Despite this, Palliser argues that Toto shares are undervalued by about 55%. Palliser said the company needs to boost the transparency about the value and outlook of the ceramics business, invest more in that unit due to its higher growth prospects and boost its capital efficiency by stepping up the sale of shares Toto has in other companies.

Toto was not immediately available for comment about Palliser's proposals. But even though the stock has skyrocketed this year, Palliser still thinks there is significantly more upside. Shares trade for about 6,200 yen (US $40), having surged from about 5,500 yen (US $35.50) on the news of its plan.

Palliser argues that the stock could hit 8,800 yen (US $56.85) if the company executes its plan, up more than 55% from where the stock was trading before Palliser made its proposal.

Analysts aren't so sure though. Only three of the seven following Toto recommend it as a Buy. Three more have it rated a Hold and one has a Sell on the stock. The average price target for the stock is a little under 4,800 yen ($US $31), more than 20% below its current price.

So even though Palliser thinks Toto looks like a bargain at its current levels, investors need to recognize that many other experts think you'd be flushing your money down the toilet if you buy this stock.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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February 20, 2026 11:48 ET (16:48 GMT)

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