Focus On EV Components And New Technologies Will Drive Future Success For Japanese Motor Manufacturer

Key Takeaways

• Nidec expects future revenue growth from its focus on EV automotive components and joint ventures in expanding EV markets.
  
• Streamlining operations and expanding into new markets and technologies aim to improve efficiency, diversify revenue, and boost profitability.
  
• Economic uncertainties, restructuring challenges, and foreign exchange losses pose risks to profitability and earnings in various business segments.

Catalysts

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

• Nidec's focus on automotive components, such as motors, stators, and rotors for EVs, along with their joint ventures in China and Europe (e.g., with Stellantis) are expected to drive future revenue growth as they scale production and capitalize on growing EV markets. This is likely to positively impact revenue and earnings.
  
• The integration of Nidec Mobility and Nidec Elesys aims to streamline operations and capitalize on increasing demand for software and system design in automotive products. This strategy is expected to support growth in margins and earnings through enhanced efficiencies and synergies.
  
• Expansion into new geographic markets, such as India and North America for their industrial and commercial products, provides Nidec with opportunities to diversify revenue streams and leverage growth in these regions, particularly with traction motor products for commercial vehicles, which is likely to enhance revenue and profitability.
  
• Nidec's restructuring initiatives within certain business segments, such as ACIM, are focused on improving operational efficiency and profitability. These efforts include reducing costs and optimizing the product lineup, which is expected to positively impact net margins and contribute to improved earnings.
  
• Investment in water cooling module technology for data centers and expansion of production facilities in global locations like Thailand and the Philippines are poised to capture growing demand in this sector. This forward-looking strategy is expected to boost revenue and potentially improve margins due to higher-value product offerings.

Nidec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nidec's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 8.3% in 3 years time.
• Analysts expect earnings to reach ¥245.7 billion (and earnings per share of ¥183.43) by about December 2027, up from ¥95.1 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 26.8x on those 2027 earnings, down from 34.2x today. This future PE is greater than the current PE for the JP Electrical industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 5.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• The decline in operating profit before income tax by 30.9% to ¥100.2 billion indicates a potential risk to net margins, likely due to foreign exchange losses and restructuring expenses, which could negatively impact earnings.
  
• The need for a significant restructuring effort in the Appliance, Commercial, and Industrial segment, incurring ¥2 billion in expenses, suggests challenges in maintaining profitability, and risks to improving net margins.
  
• The potential shortfalls in Stellantis' forecast and the fragility of the European EV market may affect revenue and profitability targets within the automotive business segment.
  
• Economic uncertainty and external macroeconomic factors, such as currency exchange fluctuations, pose a risk to future sales and operating profit margins, possibly impacting future earnings stability.
  
• The integration challenges of ACIM with automotive subsidiaries and the incurred costs of structural reforms highlight execution risks that could strain financial performance and net margins in the short term.

Valuation

• The analysts have a consensus price target of ¥4094.12 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 ¥5100.0, and the most bearish reporting a price target of just ¥2650.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥2957.9 billion, earnings will come to ¥245.7 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 6.3%.
• Given the current share price of ¥2827.0, the analyst's price target of ¥4094.12 is 30.9% 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.