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Morningstar | Fanuc Lifts its 2018 Guidance Slightly but we Downgrade FVE to JPY 30,000. See Updated Analyst Note from 25 Jul 2018

Wide-moat Fanuc posted strong first-quarter fiscal 2018 (quarter-ending June 2018) results featuring a 7.9% year-over-year increase in operating income. However, while management marginally upgraded its full-year guidance, the new guidance continues to look very conservative to us. The new guidance implies a 12% reduction in sales for the full year and a 31% reduction in operating profit, which would imply an 18.6% reduction in revenue and a 41.4% reduction in operating profit for the remaining nine months of the fiscal year. Management blamed slowing demand in the smartphone and IT market and potential uncertainty around trade frictions between countries which could lower factory investment confidence. While we can see these as potential risks, other parts of the business continue to perform well such as FA and robots. Management concern may come from total orders which were down 10% sequentially, 14% year on year. We upgrade our near-term earnings forecasts slightly but downgrade some of our longer-term forecasts. Our fair value estimate declines to JPY 30,000 from JPY 31,800 previously and we retain our wide moat rating. Our fair value implies an adjusted price/earnings ratio of 40.7 times. Fanuc remains decent value 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 33% of total sales, saw 25% growth in revenue year on year with 9.5% growth sequentially. Sales remained at a high level in Japan, Asia including China, and Europe. The market began a full-scale expansion in India. The robomachine division, which made up 23% of total sales was down 5.7% year on year and 20% sequentially. 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 year growth in revenue over the next five years with 4.1% growth in operating income. Given the International Federation of Robotics forecasts 15% average annual growth in worldwide industrial robots out to 2020, our forecasts could be accused of being conservative but we are conscious of the slowing demand from smartphones.

Fanuc continues to invest strongly in artificial intelligence, or AI, and the Internet of Things, which it believes are fundamental technologies to be adopted in all of its produce lines in the longer term. It has introduced Fanuc Intelligent Edge Link and Drive, or "Field.” 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.