R&D And Cost Reduction Will Unlock Semiconductor And Energy Potential

Key Takeaways

• Investment in R&D and capital drives expected revenue growth in semiconductors and energy, with cost reduction improving margins.
  
• International expansion and higher demand in key areas boost revenues and profits, supporting long-term growth and strategic reinvestment.
  
• Rising expenses and material costs, along with weak demand, are constraining growth and profitability across Fuji Electric's Energy and Semiconductors segments.

Catalysts

Develops power semiconductors and electronics solutions in Japan and internationally.

• Continued investment in growth, particularly through R&D and capital investment, is expected to drive future revenues, particularly in the semiconductors and energy segments, which should support revenue growth.
  
• The increased focus on cost reduction, especially within semiconductors and other segments such as ED&C components, is likely to improve net margins through operational efficiencies.
  
• The expansion in international markets, especially in India, is anticipated to significantly boost revenues with an increase in net sales by about 20%, potentially influencing long-term revenue growth positively.
  
• Higher demand from the transportation systems and IT solution projects within the Digital Transformation business could contribute to rising operating profits and margins through increased revenues in strategic growth areas.
  
• Extraordinary profits from strategic disposals of investment securities and increased free cash flow could bolster net earnings, enabling Fuji Electric to enhance shareholder returns or reinvest in growth initiatives.

Fuji Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fuji Electric's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.2% today to 7.8% in 3 years time.
• Analysts expect earnings to reach ¥98.5 billion (and earnings per share of ¥676.15) by about May 2028, up from ¥92.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥85.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.7x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the JP Electrical industry at 9.8x.
• Analysts expect the number of shares outstanding to grow by 3.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

Fuji Electric Future Earnings Per Share Growth

Risks

• The increase in expenses associated with thermal and geothermal power generation projects in the Energy segment could lead to decreased operating profit, impacting net margins and overall earnings.
  
• The impact of soaring raw material prices, particularly for silver and copper, resulted in a negative impact on profitability, affecting operating margins in the Semiconductors and ED&C components businesses.
  
• The delayed recovery in demand for ED&C components, combined with material price hikes, resulted in decreased profit in this segment, potentially impacting overall revenue growth.
  
• Weak demand for power semiconductors for xEVs overseas could constrain growth prospects in the Semiconductors segment, affecting future earnings potential.
  
• Capital investments were scaled back in the Semiconductors segment due to weak market conditions, which might limit future production capacity expansion and affect long-term revenue growth.

Valuation

• The analysts have a consensus price target of ¥8954.545 for Fuji 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 ¥10400.0, and the most bearish reporting a price target of just ¥6700.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1263.3 billion, earnings will come to ¥98.5 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of ¥6323.0, the analyst price target of ¥8954.55 is 29.4% 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.