AI And Automotive Expansion Will Strengthen Future Market Position

Key Takeaways

• Expansion into AI server and automotive products, and restructuring in multiple regions aim to enhance profitability and drive future revenue growth.
  
• Strategic acquisitions and improved cash management are set to enhance operational efficiency and boost financial health and earnings.
  
• Currency depreciation, automotive market struggles, and reliance on hard disk drive motors pose risks to profitability and revenue growth.

Catalysts

Develops, manufactures, and sells motors, electronics and optical components, and other related products in Japan and internationally.

• Nidec is focusing on expanding its AI server and water cooling system businesses, potentially driving future revenue and profitability as demand for data center components grows. This could lead to increased revenue and earnings.
  
• The company is undertaking a strategic expansion of its automotive products in China and restructuring efforts in Europe and the Americas, which is expected to improve profitability and lead to contributions from the automotive segment by fiscal year 2025. This could positively impact net margins.
  
• Nidec's acquisition strategy, such as the acquisition of Makino Milling Machine, is intended to create synergies and enhance its position in the machinery and automation sector, potentially leading to improved operating margins and profitability.
  
• Ongoing restructuring and strategic consolidation efforts, particularly in the ACIM and automotive sectors, aim to improve operational efficiency and return the segments to profitability in the medium term, likely enhancing earnings.
  
• By implementing better cash and inventory management strategies, including reducing inventory levels and enhancing production efficiency, Nidec expects to improve cash flows and financial health, which could boost future earnings.

Nidec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nidec's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 8.1% in 3 years time.
• Analysts expect earnings to reach ¥240.0 billion (and earnings per share of ¥212.73) by about January 2028, up from ¥115.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥319.7 billion in earnings, and the most bearish expecting ¥190.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, down from 27.2x today. This future PE is greater than the current PE for the JP Electrical industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• The company's profit before income taxes and profit attributable to owners were down by 4.7% and 6.7%, respectively, primarily due to the depreciation of currency and exchange rate fluctuations, impacting net margins and earnings.
  
• There are concerns about the sluggish performance in European and American automotive markets, which may affect revenue growth in those sectors.
  
• Cash flow management showed improvement, but there was a slight decrease from the previous fiscal year, reflecting potential challenges in maintaining operating efficiency and impacting free cash flow.
  
• The integration and restructuring efforts, particularly in the automotive sector, have incurred costs and appear to have caused some profit loss, which may affect future profitability and net margins.
  
• The significant reliance on the hard disk drive motor business, which constitutes 60% of the product portfolio, could pose a risk if market demand were to decline, directly impacting revenue.

Valuation

• The analysts have a consensus price target of ¥3997.06 for Nidec 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 ¥5000.0, and the most bearish reporting a price target of just ¥2600.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2973.8 billion, earnings will come to ¥240.0 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of ¥2742.5, the analyst's price target of ¥3997.06 is 31.4% 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.