Rising Inflation And Global Tensions Will Squeeze Margins

Key Takeaways

• Rising manufacturing, compliance, and R&D costs are set to compress margins and threaten Nidec's historic cost advantage amid global inflation and regulatory pressures.
  
• Elevated exposure to integration, geopolitical, and price competition risks may undermine growth, profitability, and stability in key and emerging markets.
  
• Strategic focus on high-growth sectors, cost optimization, global expansion, and innovation positions Nidec for improved margins, market share stability, and sustained long-term growth.

Catalysts

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

• Rising labor cost inflation and pressure to localize supply chains globally threaten to erode Nidec's historic cost advantage, even as management undertakes efforts to trim variable and fixed costs. Over the next several years, persistent manufacturing cost inflation is likely to squeeze operating margins further, exposing the company's aggressive cost-reduction targets as overly optimistic and resulting in lower long-term earnings.
  
• Worsening geopolitical tensions and mounting regulatory barriers between markets-especially involving the US, China, and Europe-threaten to disrupt Nidec's established customer relationships and integrated production model. As the company expands internationally, it is increasingly exposed to incremental compliance costs and custom/tariff risks, undermining global sales growth and increasing the risk of margin contraction.
  
• Intensifying commoditization of electric motors, automation components, and related solutions is expected to drive long-term price competition across Nidec's core product segments. Sustained pricing pressure from lower-cost Chinese rivals, combined with major EV manufacturers pushing toward in-house motor production, is set to erode the company's top-line growth and gross profit margins.
  
• An elevated reliance on acquisition-driven growth has increased Nidec's exposure to integration risk, as evidenced by persistent one-off restructuring and reform costs across business units. Over time, potential goodwill write-downs and impairment risks may increase, directly threatening net income stability and the company's ability to consistently deliver earnings per share growth.
  
• Escalating decarbonization and ESG requirements globally are set to elevate R&D and compliance costs faster than revenue growth in mature product lines. With limited evidence of breakthrough innovation in high-value automotive electrification and data center applications, Nidec risks lagging in emerging markets, leading to structurally lower margins and diminished revenue growth over the coming decade.

Nidec Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nidec compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nidec's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.1% today to 7.9% in 3 years time.
• The bearish analysts expect earnings to reach ¥216.7 billion (and earnings per share of ¥189.13) by about August 2028, up from ¥157.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, down from 21.0x today. This future PE is greater than the current PE for the JP Electrical industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• Nidec's strong positioning and expanding product offerings in high-growth areas such as water cooling modules for AI data centers and precision motors for nearline HDD and server applications suggest it is well placed to benefit from long-term secular trends in digitization and cloud infrastructure, which can support sustained growth in revenues and profits.
  
• Structural reforms and portfolio optimization-including focusing on five core business pillars, divesting unprofitable segments, and consolidating manufacturing capacity-are aimed at reducing ¥100 billion in variable costs and ¥50 billion in fixed costs, which could significantly enhance net margins and overall earnings over time.
  
• Global expansion of production capacity in major markets such as the United States and China, along with localizing supply chains to avoid tariff impacts, positions the company to maintain or increase market share and reduce earnings volatility in response to geopolitical or regulatory changes, thereby stabilizing revenue and earnings.
  
• Strong customer engagement and robust order backlogs, particularly in the automotive alternator/power generator and MOEN business units, indicate visibility into future sales and a foundation for revenue growth in coming years, especially as transportation and energy sectors accelerate electrification.
  
• Increased coordination of global R&D and technology functions, along with targeted investments in integrating acquired technologies and businesses, demonstrates Nidec's commitment to innovation and next-generation product development, which may drive margin expansion and long-term earnings growth if successfully executed.

Valuation

• The assumed bearish price target for Nidec is ¥2600.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nidec's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4800.0, and the most bearish reporting a price target of just ¥2600.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥2753.2 billion, earnings will come to ¥216.7 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of ¥2882.0, the bearish analyst price target of ¥2600.0 is 10.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.