BluStellar And AI Innovations Propel Revenue Growth And Transform IT Services

Key Takeaways

• NEC's strategic reorganization and acquisitions position it to boost IT services for municipalities, offering potential for revenue growth and operational efficiencies.
  
• Growing demand for NEC's BluStellar and AI-enabled solutions highlights opportunities for high-margin projects, capturing trends in digital transformation and security.
  
• Deconsolidation and revenue volatility pose challenges to NEC's profitability, while stagnant earnings outlook may affect stock price growth.

Catalysts

Provides information and communication technology solutions in Japan and internationally.

• The potential for increased revenue in IT Services is significant, with a 17% increase in total bookings, driven by large projects and increased platform standardization at the local government level. This could lead to higher future revenues.
  
• Social Infrastructure adjusted operating profit shows potential for improved margins due to resource shifting and enhanced efficiency in development expenses, impacting net margins positively.
  
• NEC's strategic reorganization, including the acquisition of NEC Networks, aims to consolidate resources and strengthen IT services for municipalities and SMEs, indicating an opportunity for revenue growth and improved operational efficiencies.
  
• The growing demand for NEC's BluStellar products, with orders up 40% year-on-year, shows potential for both revenue growth and improved profitability by capturing high-margin projects utilizing AI and security products.
  
• NEC's initiative to expand AI-enabled solutions for advanced contact center operations and security offers potential for boosting earnings by enhancing service offerings and tapping into high-demand digital transformation trends.

NEC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NEC's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.9% in 3 years time.
• Analysts expect earnings to reach ¥218.4 billion (and earnings per share of ¥818.59) by about November 2027, up from ¥150.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥246.0 billion in earnings, and the most bearish expecting ¥188.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2027 earnings, down from 23.6x today. This future PE is lower than the current PE for the JP IT industry at 45.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

NEC Future Earnings Per Share Growth

Risks

• The deconsolidation of JAE resulted in decreases in revenue and profit for some segments, posing a challenge to their profitability and overall earnings.
  
• The decline in Telecom Service revenue due to deconsolidation of the Wireless business and reduced global 5G revenues could negatively impact future revenue streams from these areas.
  
• The financial outlook remains unchanged from prior forecasts, indicating a lack of expected growth in earnings projections, which could hinder stock price appreciation.
  
• Risks associated with integrating NEC Networks and NEC Nexsolutions may impact operational efficiency, leading to potential costs that can affect net margins.
  
• Dependence on large-scale projects for certain revenue increases could expose the company to revenue volatility, impacting consistent revenue growth.

Valuation

• The analysts have a consensus price target of ¥15010.0 for NEC 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 ¥17000.0, and the most bearish reporting a price target of just ¥11700.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥3713.6 billion, earnings will come to ¥218.4 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of ¥13275.0, the analyst's price target of ¥15010.0 is 11.6% 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.