Efficiency Improvements In Key Segments Will Strengthen Operational Performance

Key Takeaways

• Ongoing efficiency improvements and strategic focus in key segments are anticipated to enhance operational performance and drive consistent revenue growth.
  
• Strong free cash flow, buybacks, and favorable foreign exchange position the company well for future growth investment and earnings support.
  
• Rising costs and stagnant demand, along with exchange fluctuations, pose challenges to sustaining growth across Mitsubishi Electric's key segments and markets.

Catalysts

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

• The ongoing profitability and efficiency improvements across Mitsubishi Electric’s business segments, including Infrastructure, Automotive Equipment, and Semiconductor and Device, are expected to enhance operational performance, potentially leading to increased net margins and earnings.
  
• Strong demand for Mitsubishi Electric's achievements in energy systems alignment with the global push towards renewable energy is likely to boost revenue growth as markets expand.
  
• Mitsubishi Electric’s strategic focus on maintenance and renewal within its Building Systems segment, especially in Japan and abroad, is anticipated to drive consistent revenue growth.
  
• Positive impacts from foreign exchange fluctuations, particularly from a weaker yen, are contributing to increased revenue from overseas markets, improving earnings and revenue figures.
  
• Mitsubishi Electric's robust free cash flow from operating activities, increased buybacks, and strong shareholder returns position the company favorably for continued growth investment, likely supporting future earnings growth.

Mitsubishi Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsubishi Electric's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 6.7% in 3 years time.
• Analysts expect earnings to reach ¥398.7 billion (and earnings per share of ¥194.0) by about December 2027, up from ¥283.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥445.6 billion in earnings, and the most bearish expecting ¥260.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2027 earnings, down from 19.4x today. This future PE is lower than the current PE for the GB Electrical industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.97%, as per the Simply Wall St company report.

Mitsubishi Electric Future Earnings Per Share Growth

Risks

• The stagnation in demand for power semiconductors, as well as the absence of large-scale deals in some areas, may lead to challenges in sustaining revenue growth in the semiconductor segment.
  
• The FA Systems segment is experiencing a lack of significant demand recovery, particularly for lithium-ion battery and decarbonization-related offerings, which could impact revenue and operating profit.
  
• Labor and R&D cost increases, as well as higher component and logistics costs, might reduce net margins if these expenses continue to rise without sufficient offsetting gains in efficiency.
  
• A valuation loss due to foreign denominated bonds and debt, as well as foreign exchange fluctuations, could negatively impact net profit and earnings, especially if the yen continues to strengthen.
  
• Stagnant demand for home air conditioning systems in key markets like Europe, despite growth in other regions, might pressure revenues in the Lifestyle segment if recovery in these markets remains slow.

Valuation

• The analysts have a consensus price target of ¥2842.67 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 ¥3400.0, 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 2027, revenues will be ¥5922.3 billion, earnings will come to ¥398.7 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.0%.
• Given the current share price of ¥2645.5, the analyst's price target of ¥2842.67 is 6.9% higher. 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.