Elevator Pitch
My rating for Fanuc Corporation (OTCPK:FANUY, OTCPK:FANUF) [6954:JP] is a Buy.
The focus of my prior March 29, 2024, update was Fanuc Corporation’s “near-term business performance” and its “long-term growth prospects.” With the current write-up, I preview FANUY’s upcoming quarterly results and assess the stock’s valuations.
I am expecting Fanuc Corporation to register a better-than-expected set of results for Q1 FY 2024 (YE March 31, 2025), and the stock is trading below fair valuation based on my analysis. Considering these factors, I raise my rating for FANUY from a Hold to a Buy.
The company’s shares can be traded on the Japanese stock market and the OTC or Over-The-Counter market. The mean daily trading values for Fanuc Corporation’s OTC shares and its shares listed on the Tokyo Stock Exchange were $5 million and $70 million (source: S&P Capital IQ), respectively, for the last 10 trading days. US stockbrokers like Interactive Brokers allow their clients to buy or sell Japan-listed shares.
My Prediction Is A Q1 FY 2024 Results Beat
Fanuc Corporation is expected to report the company’s financial results for the first quarter of fiscal 2024 (April 1, 2024, to June 30, 2024) in late July. I hold the opinion that FANUY’s Q1 FY 2024 financial performance will be a positive surprise.
The market currently has a pessimistic view of FANUY’s expected results for Q1 FY 2024. As per S&P Capital IQ consensus data, the sell-side analysts are anticipating that Fanuc Corporation’s top line and operating profit will decrease by -7.9% YoY and -6.3% YoY, respectively for the first quarter in local currency or JPY terms.
But there are various indicators suggesting that the factory automation industry and Fanuc Corporation will perform better than expected in the second quarter of calendar year 2024 (or Q1 FY 2024 for FANUY).
BofA Securities recently published a research report (not publicly available) on June 6, 2024, titled “China Automation: From Structural Growth To Cyclical.” BofA Securities’ “channel check suggests the channel destocking is close to an end, and the inventory turnover of (Chinese) local FA (Factory Automation) distributors will likely return to normal level (1-2 months) by 2Q24” as per the firm’s recent early-June report.
At the company’s previous FY 2023 analyst call on April 24, 2024, FANUY mentioned that “regarding FA, the inventory in China has significantly diminished.” Fanuc Corporation also added at the most recent analyst briefing that “orders are starting to come in for models which have completed inventory adjustments.”
Fanuc Corporation supplies its factory automation products to Mainland China via local distributors. A potential improvement in the inventory situation at China’s factory automation product distribution companies will have favorable read-throughs for FANUY’s future financial results.
Separately, there are positive takeaways from the most recent monthly industry numbers.
According to the May 2024 report from JMTBA or Japan Machine Tool Builders’ Association, Japan’s total machine tool order value rose by +4.2% YoY and +3.0% MoM to JPY124.6 billion in the latest month. In contrast, the Japanese market’s aggregate machine tool orders contracted by -8.9% YoY for April 2024. This is another sign indicating that the worst is over for the factory automation sector.
To sum things up, I expect Fanuc Corporation’s actual Q1 FY 2024 revenue and operating income to surpass the sell side’s expectations. My bullish view of FANUY’s first quarter results is supported by analysts’ channel checks, the management’s commentary, and the recent monthly industry data.
The Stock Has The Potential To Command A Higher Valuation
FANUY’s valuations are appealing, considering the stock’s historical trading averages and the company’s bottom-line growth outlook.
The market currently values Fanuc Corporation at a consensus forward FY 2025 P/E multiple of 24.6 times based on S&P Capital IQ data. The stock’s three-year and 10-year mean P/E ratios are comparatively higher at 29.2 times and 32.2 times (source: S&P Capital IQ), respectively.
In my previous late-March 2024 article, I stressed that Fanuc Corporation “has continued to invest in innovation and geographic expansion, which bodes well for its long-term growth prospects.” Separately, UBS Group AG (UBS) projects that the worldwide “automation and robotics” market can expand by +32% between 2023 and 2025 to $346 billion.
As a play on the factory automation investment theme, there is justification for Fanuc Corporation to be trading at a higher 1.2 times PEG (Price-to-Earnings Growth) multiple as compared to the 1 times PEG (rule of thumb) indicative of fair valuation. Also, the company’s consensus FY 2023-2025 EPS CAGR forecast is +26.0% according to data taken from S&P Capital IQ. A PEG metric of 1.2 times translates into a target P/E multiple of 31.2 times (1.2*26) for Fanuc Corporation.
In summary, Fanuc Corporation’s shares are undervalued considering its earnings growth prospects and historical valuations.
Variant View
But FANUY’s stock could perform poorly under certain scenarios.
One scenario is that Fanuc Corporation’s actual Q1 2024 financial results fall short of the analysts’ expectations due to a slower-than-expected recovery in the factory automation market.
Another scenario is that there is a de-rating of Japanese equities across the board as a result of unfavorable government policies in Japan or investor outflows into other countries’ equity markets.
Final Thoughts
My opinion of Fanuc Corporation as a potential investment candidate has become more favorable considering the company’s expected Q1 FY 2024 financial performance and the stock’s undervaluation. I rate Fanuc Corporation as a Buy with expectations that its P/E multiple can re-rate to its historical average or the equivalent of 1.2 times PEG.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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