Intensifying US Competition Will Shrink Profit Margins To 27%

Key Takeaways

• Intensifying competition in the U.S. and rising sales expenses might compress net margins despite efforts to increase inventory turnover.
  
• Currency fluctuations and restructuring costs could significantly impact profit, with negative effects on sales and overall earnings anticipated.
  
• Strong sales growth, cost improvements, and expansion of successful models position Mitsubishi Motors for potential revenue gains and increased market share, particularly in ASEAN, North America, and Australia.

Catalysts

Engages in the development, production, and sale of passenger vehicles, and its parts and components in Japan, Europe, North America, Oceania, the rest of Asia, and internationally.

• Mitsubishi Motors anticipates increased sales expenses due to intensifying market competition, particularly in the U.S., which could compress net margins as they attempt to boost inventory turnover and respond to competitive pressures.
  
• The forecasted deterioration in procurement and shipping costs, driven by inflation and the need for supplier support, is expected to negatively impact operating profit margins, with a projected ¥12 billion decrease.
  
• The adverse impact of currency fluctuations, especially the strengthening of the Thai baht, is anticipated to result in exchange rate losses, reducing ordinary profit by ¥100 billion.
  
• The decline in wholesale volumes, particularly in Europe, the Middle East, and ASEAN regions, suggests potential reductions in net sales and revenue growth, with a forecasted decrease of ¥120 billion in net sales for fiscal year 2024.
  
• Restructuring costs, such as those associated with the Thai business and voluntary early retirements, are expected to lead to a ¥109 billion reduction in net income, impacting the company's overall earnings.

Mitsubishi Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsubishi Motors's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.1% today to 2.7% in 3 years time.
• Analysts expect earnings to reach ¥80.2 billion (and earnings per share of ¥59.5) by about March 2028, down from ¥85.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥176.0 billion in earnings, and the most bearish expecting ¥13.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, up from 7.0x today. This future PE is lower than the current PE for the JP Auto industry at 8.3x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.91%, as per the Simply Wall St company report.

Mitsubishi Motors Future Earnings Per Share Growth

Risks

• Mitsubishi Motors reported an increase in retail sales volume in the third quarter by 7% year-on-year, which could indicate potential for growing revenue and market share, particularly with new models driving demand.
  
• The company achieved improvements in procurement and shipping costs with a ¥4.6 billion positive impact, suggesting potential for maintaining or improving net margins through cost management.
  
• Growth was observed in the ASEAN region where market share increased despite economic challenges, and there is continued strong demand for commercial vehicles, which could support revenue growth.
  
• The newly launched models, such as TRITON in Indonesia and OUTLANDER PHEV in Japan, have shown strong sales performance, which could positively impact future earnings as they expand into other regions.
  
• The company plans to expand successful new models like OUTLANDER PHEV in competitive markets such as North America and Australia, which could lead to increased revenue and reduced sales expenses over time.

Valuation

• The analysts have a consensus price target of ¥444.167 for Mitsubishi Motors based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥550.0, and the most bearish reporting a price target of just ¥360.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2950.8 billion, earnings will come to ¥80.2 billion, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 10.9%.
• Given the current share price of ¥444.4, the analyst price target of ¥444.17 is 0.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.