Carbon Fiber Recovery And Margin Expansion Will Drive A Powerful Upswing Ahead

Catalysts

About Toray Industries

Toray Industries is a diversified advanced materials company focused on fibers and textiles, performance chemicals, carbon fiber composites, and environment and life science solutions.

What are the underlying business or industry changes driving this perspective?

• Ongoing business structure reform and strategic pricing in Fibers and Textiles, already visible in rising core operating income despite softer revenue, position Toray to expand margins and stabilize earnings as global demand normalizes.
• Recovery in automotive related resin demand, combined with improved spreads in ABS resins and higher value added chemicals, supports a cyclical rebound in Performance Chemicals revenue and a disproportionate uplift in operating profit.
• Gradual normalization of inventory levels and continued recovery in aerospace and high end sports applications for carbon fiber composites should unlock higher capacity utilization and operating leverage, boosting both revenue and net margins.
• Rebound in large scale water treatment projects in the Middle East and improving engineering project timing in Japan can drive a step up in Environment and Engineering revenue while leveraging Toray's installed base to enhance recurring earnings quality.
• Disciplined capital allocation through increased R and D spending, dividend growth and sizeable share buybacks, funded within a conservative balance sheet structure, supports long term earnings expansion per share even in a moderate top line growth environment.

Assumptions

This narrative explores a more optimistic perspective on Toray Industries compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Toray Industries's revenue will grow by 6.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.4% today to 5.3% in 3 years time.
• The bullish analysts expect earnings to reach ¥161.2 billion (and earnings per share of ¥128.63) by about December 2028, up from ¥59.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥109.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, down from 26.4x today. This future PE is greater than the current PE for the JP Chemicals industry at 12.4x.
• The bullish analysts expect the number of shares outstanding to decline by 5.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged slowdown in global trade driven by U.S. tariff policies, supply chain realignments and intensified competition from China could structurally weaken demand across Toray's export oriented segments, limiting the ability to return to consistent top line growth and putting sustained pressure on revenue and core operating income.
• Persistent weak market conditions in key growth platforms such as battery separator films, OLED related materials and chemicals, as already seen in stagnant sales and worsening spreads, may indicate longer term technological or competitive headwinds that compress pricing power and reduce net margins and earnings.
• Ongoing inventory adjustments and project delays in high value businesses like carbon fiber composites, aerospace, wind turbine applications and large water treatment projects in the Middle East could reflect structural demand volatility rather than temporary timing issues, reducing operating leverage and constraining both revenue growth and profit expansion.
• Rising financial leverage from increased borrowings and sustained share buybacks, combined with negative free cash flow, may over time limit Toray's capacity to fund capital expenditure and research and development at competitive levels, undermining innovation led differentiation and thereby weighing on long term earnings growth and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Toray Industries is ¥1492.62, which represents up to two standard deviations above the consensus price target of ¥1137.08. This valuation is based on what can be assumed as the expectations of Toray Industries's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥1500.0, and the most bearish reporting a price target of just ¥860.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ¥3046.3 billion, earnings will come to ¥161.2 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of ¥1044.5, the analyst price target of ¥1492.62 is 30.0% 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.