Restructuring And DX Investment Will Boost Operational Efficiency

Key Takeaways

• Nidec's cost reductions and restructuring are set to enhance net margins by eliminating unprofitable businesses and reducing fixed costs.
  
• Strategic investments in digital transformation and sustainable infrastructure are expected to drive revenue growth and operational efficiency.
  
• Nidec faces risks from geopolitical tensions in China, restructuring costs, strategic execution challenges, M&A integration issues, and economic uncertainties affecting cash flow and earnings stability.

Catalysts

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

• Nidec plans to achieve significant cost reductions by improving variable and fixed costs through discontinuing unprofitable and noncore businesses, which is expected to enhance net margins.
  
• Strategic investments in digital transformation (DX) and other improvements are anticipated, aiming to spend around 1% of net sales, which should boost long-term revenue and operational efficiency.
  
• Nidec's restructuring efforts, including consolidating production sites and reducing fixed costs, are expected to lead to improved net margins by cutting down on unnecessary expenses.
  
• The focus on high-growth potential areas, such as sustainable infrastructure and energy, and the base of AI society, is likely to drive revenue growth and improve the overall financial performance.
  
• Nidec's strategy to enhance production capacity, particularly in the power generation and BESS sectors, is expected to capitalize on rising demand, positively impacting future revenue and profitability.
  

Nidec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nidec's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ¥239.4 billion (and earnings per share of ¥212.64) by about May 2028, up from ¥167.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥280.2 billion in earnings, and the most bearish expecting ¥207.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 17.3x 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 decline by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• The company's ongoing reliance on automotive components and traction motor operations in China poses risks due to potential geopolitical tensions and export restrictions on rare earth materials, which could lead to supply chain disruptions and affect revenue and profit margins.
  
• The restructuring and cost-cutting efforts, including reducing fixed and variable costs, might initially incur substantial expenses and could impact net margins in the short term before any potential long-term benefits are realized.
  
• The strategic shift towards discontinuing unprofitable and non-core businesses, as well as consolidating production sites, presents execution risks and could result in temporary operational disruptions, potentially impacting both revenues and margins.
  
• The company's growth strategy relies heavily on M&A activity, which introduces integration challenges and the potential for overpayment for acquisitions, potentially impacting earnings and cash flow if expected synergies are not realized.
  
• The uncertainty in global economic conditions, including potential recessions and fluctuating tariffs, coupled with the company's significant investments in strategic areas, may pressure cash flow management and earnings stability if external market conditions worsen.

Valuation

• The analysts have a consensus price target of ¥3753.125 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 ¥2350.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2925.1 billion, earnings will come to ¥239.4 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of ¥2533.0, the analyst price target of ¥3753.12 is 32.5% 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.