Demand In Renewable Energy And Defense Sectors Will Drive Future Operating Improvements

Key Takeaways

• Growth in Infrastructure and Life segments, driven by data centers, transport, and renewable energy, is expected to boost future revenue and margins.
  
• Profitability and revenue across Energy Systems and other segments are set to increase due to demand, improved contracts, and optimized inventory management.
  
• Weak investment in decarbonization, currency effects, and temporary factors challenge Mitsubishi Electric's revenue and profit sustainability.

Catalysts

Develops, manufactures, distributes, and sells electrical and electronic equipment worldwide.

• Mitsubishi Electric is experiencing growth in the Infrastructure and Life segments, propelled by strong performance in UPS for data centers, transportation, and renewable energy sectors. This demand is expected to drive future revenue growth and improve operating margins in these segments.
  
• Profitability improvement initiatives, particularly in the Energy Systems business, are expected to continue due to increased demand for power stabilization and renewable energy, likely leading to higher operating margins and earnings.
  
• The Defense & Space Systems business expects a significant increase in orders and revenue for the full year, with improved contract terms potentially enhancing future operating profit margins and earnings.
  
• Mitsubishi Electric's efforts to optimize inventory balance have resulted in decreased inventory levels, which could lead to improved cash flow and operational efficiency, impacting net margins and earnings positively.
  
• There is an upward revision in the forecast for the Semiconductor & Device segment, supported by strong demand for optical communication devices. This segment is anticipated to contribute to future revenue and operating profit growth, enhancing overall earnings.

Mitsubishi Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsubishi Electric's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 6.8% in 3 years time.
• Analysts expect earnings to reach ¥411.3 billion (and earnings per share of ¥199.31) by about March 2028, up from ¥346.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥255.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 15.3x today. This future PE is greater than the current PE for the GB Electrical industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

Mitsubishi Electric Future Earnings Per Share Growth

Risks

• The Industry & Mobility segment experienced a year-on-year decline in both revenue and operating profit due to weak investment in the decarbonization sector and ongoing negotiations in the Automotive Equipment business, which might impact future earnings growth.
  
• Increased SG&A expenses, driven by currency translation effects due to a weaker yen and higher personnel expenses and R&D investment, could pressure net margins.
  
• Although the Semiconductor & Device segment showed operating profit growth, there was a decline in revenue, indicating potential stagnation in demand for certain products like EV and air conditioning-related semiconductors, which could impact revenue streams.
  
• The reliance on temporary factors, such as project portfolio changes in the Defense & Space Systems business that improved profit margins, suggests that these high margins may not be sustainable, posing a risk to consistent operating profit.
  
• The weaker yen contributed positively to revenue, but dependence on favorable exchange rates poses a risk, as shifts could adversely affect revenue and profit margins over time.

Valuation

• The analysts have a consensus price target of ¥2861.875 for Mitsubishi Electric 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 ¥3500.0, and the most bearish reporting a price target of just ¥1800.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥6028.8 billion, earnings will come to ¥411.3 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of ¥2561.5, the analyst price target of ¥2861.88 is 10.5% 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.