Morningstar | Fanuc Hit by China Slowdown; We Downgrade Our FVE to JPY 28,100
Wide-moat Fanuc posted weaker fiscal 2018 second-quarter (ended September) results featuring a 9.5% year-over-year decrease in revenue and 22.8% decrease in operating income. Management made mild reductions in its full-year guidance, with revenue guidance reduced by 2% to JPY 626 billion and operating profit guidance reduced by 5% to JPY 150.9 billion. The new guidance implies 19% and 51% reductions in second-half revenue and operating profit, respectively. Highlighting the potential impact of the trade war, Fanuc’s sales in China were down 48%, while sales excluding China were up 7%. We downgrade our earnings forecasts slightly, reducing our fair value estimate to JPY 28,100 (USD 25 per ADR) from JPY 30,000 (USD 27 per ADR) previously. We retain our wide moat rating. Our fair value estimate implies an adjusted price/earnings ratio of 38 times. Fanuc remains a decent value in 4-star territory at current prices, although the uncertainty surrounding the trade friction and smartphone market could trigger some short-term volatility.The FA division, which accounted for 36% of total sales, saw 4% growth in revenue year on year. Sales remained at a high level in Japan, Asia including China, and Europe. The market began a full-scale expansion in India. The company focused on expanding sales of fiber laser oscillators both in Japan and overseas. The Robomachine division, which made up 33% of total sales, was down 4% year on year. Within this division, Robodrills (compact machining centers) decreased significantly due to the IT and smartphone markets, while other products such as Roboshots and Robocuts remain at a high level.
Our base-case forecasts now incorporate 2.6% per annum growth in Fanuc’s revenue over the next five years with 2.6% growth in operating income. Given that the International Federation of Robotics forecasts 13.4% average annual growth in worldwide industrial robots for the four years out to 2021, our forecasts could be accused of being conservative, but we are conscious that the base year in our forecasts is seemingly at a cyclical high.
Fanuc continues to invest strongly in artificial intelligence and "Internet of Things," which it believes are fundamental technologies to be adopted in all of its product lines in the longer term. It has introduced Fanuc Intelligent Edge Link and Drive. The system, introduced in 2016, is an open, cloud-based platform that allows Fanuc to collect global manufacturing data in real time and funnel it to self-teaching robots. Given its high existing market share, we believe the application of Big Data and AI technologies to self-teaching robots and machines could add further strength to Fanuc’s wide moat.
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