Stock Analysis

A Look At The Intrinsic Value Of Fanuc Corporation (TSE:6954)

TSE:6954
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Key Insights

  • Fanuc's estimated fair value is JP¥3,628 based on 2 Stage Free Cash Flow to Equity
  • Current share price of JP¥3,734 suggests Fanuc is potentially trading close to its fair value
  • Our fair value estimate is 24% lower than Fanuc's analyst price target of JP¥4,753

Today we will run through one way of estimating the intrinsic value of Fanuc Corporation (TSE:6954) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2026202720282029203020312032203320342035
Levered FCF (¥, Millions) JP¥150.9bJP¥150.7bJP¥156.2bJP¥164.7bJP¥179.4bJP¥186.9bJP¥192.6bJP¥197.0bJP¥200.4bJP¥203.1b
Growth Rate Estimate SourceAnalyst x8Analyst x8Analyst x5Analyst x3Analyst x3Est @ 4.19%Est @ 3.07%Est @ 2.28%Est @ 1.73%Est @ 1.35%
Present Value (¥, Millions) Discounted @ 5.9% JP¥142.4kJP¥134.3kJP¥131.4kJP¥130.8kJP¥134.5kJP¥132.3kJP¥128.7kJP¥124.3kJP¥119.3kJP¥114.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥1.3t

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.4%. We discount the terminal cash flows to today's value at a cost of equity of 5.9%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = JP¥203b× (1 + 0.4%) ÷ (5.9%– 0.4%) = JP¥3.7t

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥3.7t÷ ( 1 + 5.9%)10= JP¥2.1t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is JP¥3.4t. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of JP¥3.7k, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
TSE:6954 Discounted Cash Flow July 11th 2025

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Fanuc as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 5.9%, which is based on a levered beta of 1.040. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

View our latest analysis for Fanuc

SWOT Analysis for Fanuc

Strength
  • Earnings growth over the past year exceeded the industry.
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Machinery market.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
Threat
  • Annual earnings are forecast to grow slower than the Japanese market.

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Fanuc, we've compiled three additional aspects you should assess:

  1. Risks: As an example, we've found 1 warning sign for Fanuc that you need to consider before investing here.
  2. Future Earnings: How does 6954's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSE every day. If you want to find the calculation for other stocks just search here.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.