Digital Transformation And Uvance Propel Growth Amid Global Challenges

Key Takeaways

• Strong growth in digital transformation services in Japan boosts revenue and suggests potential future increases in overall revenue.
  
• Strategic investments in growth sectors and exiting low-profit areas are expected to enhance long-term earnings through improved operational efficiency.
  
• International revenue decline and challenges in hardware and device solutions could pressure earnings and margins, particularly with weak performance in Europe and Americas.

Catalysts

Operates as an information and communication technology company in Japan and internationally.

• The Service Solutions segment is experiencing strong growth, primarily driven by digital transformation and modernization services in Japan, which increased revenue by 7% for business operations in Japan. This suggests potential future revenue growth as demand in Japan remains robust, which can positively impact overall revenue.
  
• Fujitsu Uvance, a key growth area, has seen a 30% increase in orders year-on-year and aims to achieve revenue growth from ¥450 billion in fiscal '24 to ¥700 billion in fiscal 2025. This significant growth target indicates potential for substantial revenue increases and is expected to impact earnings positively.
  
• The improvement in profitability measures, including standardization of development, automation, and better management of profitability, resulted in an adjusted operating profit margin improvement of 2.3 percentage points and a gross margin increase of 2.6 percentage points. These initiatives suggest a potential for higher net margins and improved earnings going forward.
  
• The modernization business showed a 69% increase in revenue in the first half of fiscal 2024, with plans to reach ¥200 billion for the full year. This substantial growth in the digital transformation space could significantly boost both revenue and profit margins.
  
• The company is investing proactively in growth areas such as Uvance offerings and employee training, despite increased expenses. These investments, coupled with restructuring efforts like exiting low-profit businesses, are expected to drive long-term earnings growth as they improve operational efficiencies and align with high-demand markets.

Fujitsu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fujitsu's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 8.0% in 3 years time.
• Analysts expect earnings to reach ¥319.4 billion (and earnings per share of ¥184.28) by about November 2027, up from ¥252.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥275.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2027 earnings, up from 20.2x 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 decline by 1.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.9%, as per the Simply Wall St company report.

Fujitsu Future Earnings Per Share Growth

Risks

• Revenue outside Japan has declined by 4% due to the carve-out of low-profitability businesses, which could impact future international revenue growth.
  
• Hardware Solutions faced challenges with decreased revenue and profit, affected by higher procurement costs due to a weak yen, which could pressure net margins.
  
• The Ubiquitous Solutions segment experienced a significant revenue drop of 16.9% due to exiting European markets, which could affect overall earnings.
  
• Device Solutions revenue growth is below expectations due to slower recovery in demand for electric components, potentially affecting future revenue forecasts.
  
• International regions, especially in Europe and Americas, saw a decline in orders and revenue, which may hinder earnings growth if not reversed.

Valuation

• The analysts have a consensus price target of ¥3249.09 for Fujitsu 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 ¥3700.0, and the most bearish reporting a price target of just ¥2000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥3994.7 billion, earnings will come to ¥319.4 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of ¥2787.5, the analyst's price target of ¥3249.09 is 14.2% 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.