Calculated Telecom Partnerships And Green Energy Investments Ignite Future Growth

Key Takeaways

• Strategic partnerships and investments in digital services, green energy, and mobility could drive substantial future revenue and profitability growth.
  
• Shareholder-focused policies, including share buybacks and dividends, suggest a positive financial outlook despite current stock undervaluation.
  
• Deconsolidation and sector-specific challenges, alongside currency and political uncertainties, pose risks to Hitachi's earnings stability and sector revenue growth.

Catalysts

Provides digital system and services, green energy and mobility, and connective industry solutions in Japan and internationally.

• Hitachi's strategic partnership with major telecom companies like Singtel and collaborations with domestic companies could expand its digital service offerings, impacting future revenue growth positively.
  
• The significant investment in expanding service businesses, leveraging digital technologies, and focusing on customer asset lifecycle management, is expected to enhance profitability and improve operating margins long-term.
  
• Large scale investments in green energy and mobility, with a particular focus on GX-related technologies and digital system services could drive substantial revenue growth in the coming years.
  
• The development and integration of advanced digital solutions, like AI-driven asset management for railways and energy sectors, could enhance operational efficiency and drive strong earnings growth.
  
• Share buybacks and dividend increases as part of shareholder return policies might support EPS growth, reflecting a positive future financial outlook despite current stock undervaluation.

Hitachi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hitachi's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 8.8% in 3 years time.
• Analysts expect earnings to reach ¥971.1 billion (and earnings per share of ¥216.74) by about November 2027, up from ¥673.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥1069.0 billion in earnings, and the most bearish expecting ¥757.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2027 earnings, down from 26.0x today. This future PE is greater than the current PE for the JP Industrials industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.98%, as per the Simply Wall St company report.

Hitachi Future Earnings Per Share Growth

Risks

• Hitachi's financial performance is impacted by the deconsolidation of Astemo, with a year-on-year decline in consolidated EBITA due to equity losses from Hitachi Astemo. This may affect overall earnings stability.
  
• There is pressure on Digital Systems & Services (DSS) margins due to intensified competition and memory cost increases in the storage business, possibly impacting future net margins.
  
• Hitachi Energy faces challenges with project delays, particularly in multiyear HVDC projects, which could affect short-term revenue and profitability forecasts.
  
• Currency volatility, specifically fluctuations in the yen, is a concern for Hitachi, as it affects their financial results and forecasts, potentially impacting net income and adjusted EBITA.
  
• The political uncertainty in major markets like the United States and Japan could influence infrastructure and energy policies, potentially affecting Hitachi’s revenue in these sectors.

Valuation

• The analysts have a consensus price target of ¥4503.16 for Hitachi 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 ¥5400.0, and the most bearish reporting a price target of just ¥3500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥11045.5 billion, earnings will come to ¥971.1 billion, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 5.0%.
• Given the current share price of ¥3816.0, the analyst's price target of ¥4503.16 is 15.3% higher.
• 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.