The Focus On All-Solid-State Batteries And Neuromorphic Devices Will Strengthen Future Market Competitiveness

Key Takeaways

• Structural reforms and enhanced cash flow strategies are positively impacting TDK's financial stability and potential earnings growth.
  
• Expansion into high-demand markets and focus on innovative technologies could boost TDK's revenues and market position.
  
• Economic instability and currency fluctuations threaten TDK's revenue growth and profitability across multiple market segments.

Catalysts

Engages in manufacture and sale of electronic components in Japan, Europe, China, Asia, the Americas, and internationally.

• TDK anticipates growth in the smartphone and HDD (hard disk drive) market segments, with increased production of smartphones and Nearline HDDs for data centers. This suggests a potential increase in revenue due to rising demand in these ICT markets.
  
• The company is focusing on enhancing free cash flow management, exceeding initial expectations, and targeting ¥120 billion in free cash flow. This strategic focus could help improve overall earnings and financial stability.
  
• Expansion of high-frequency components and magnetic sensors sales to both the automotive and ICT markets is underway, as well as increased profitability from these sales. This could lead to improved net margins due to higher demand and operational efficiencies.
  
• TDK has implemented structural reforms and continuous cost rationalization measures, resulting in cost reductions and increased operating profit margins. This suggests potential for improved future earnings as these efficiencies take hold.
  
• Continued development and commercialization of innovative technologies such as all-solid-state battery materials and neuromorphic devices signal a commitment to future growth and market expansion, potentially increasing revenue streams through new product offerings.

TDK Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TDK's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 9.4% in 3 years time.
• Analysts expect earnings to reach ¥231.2 billion (and earnings per share of ¥124.49) by about January 2028, up from ¥176.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥276.9 billion in earnings, and the most bearish expecting ¥198.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2028 earnings, up from 20.0x today. This future PE is greater than the current PE for the JP Electronic industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

TDK Future Earnings Per Share Growth

Risks

• The global economic instability, particularly the slowdown in China's economy and sluggishness in Europe, could negatively affect TDK's revenue growth across different markets, including automotive and industrial equipment.
  
• The depreciation of the yen has contributed significantly to increased profits, suggesting that any reversal in currency trends could adversely impact net margins and earnings.
  
• The slowdown in demand for BEVs (Battery Electric Vehicles) has led to reduced sales in automotive components and could continue to negatively impact revenue and profitability in the automotive market segment.
  
• The absence of onetime gains, such as those from past asset sales in the Sensor Application Products, indicates that future operating profits might not meet previous highs, potentially affecting net margins and earnings.
  
• The variability in raw material prices affecting selling prices of rechargeable batteries could continue to put pressure on TDK’s revenue and net margins in the Energy Application Products segment.

Valuation

• The analysts have a consensus price target of ¥2281.18 for TDK 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 ¥2700.0, and the most bearish reporting a price target of just ¥1700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2471.7 billion, earnings will come to ¥231.2 billion, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 6.2%.
• Given the current share price of ¥1859.5, the analyst's price target of ¥2281.18 is 18.5% 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.