EUR 850.00 For Business Accounts Only

Morningstar | Fanuc Upgrading Its Factories and Fighting Macro Headwinds; FVE Reduced to JPY 22,000. See Updated Analyst Note from 03 Jun 2019

Wide-moat Fanuc announced over the past three months, that it will build two new factories. It will replace its two existing Robonano factories with a larger and more advanced one, which will introduce the turning functionality into the current Robonano for machining. The company will invest JPY 3.5 billion in the new factory and should be ready to start production in October 2019. A similar project will be undertaken combining the two existing Servo motor parts machining factories into one new factory to increase in-house production. This will cost JPY12 billion but will not include manufacturing equipment and should be ready at about the same time as the Robonano factory.

The disruption that these upgrades will cause may be partially the reason for the company’s guidance for the fiscal year ending March 2020 of net sales down 15.5%, operating income down 53.8% and net income down 60%. Also, global smartphone shipments were down 4.4% in 2018 and 6.6% in first quarter 2019, and this is not helping. The recent downturn in the official Chinese manufacturing purchasing managers’ index, which dropped to 49.4 in May 2019, from 50.1 in April is also negative for Chinese factory owners investing in robots and automated machinery. The Japanese machine tool orders, by value, also declined 26% in the first quarter of 2019, after it grew at 35% from mid-2017 to mid-2018. We reduce our fair value estimate to JPY 22,000 (and USD 20.30 per ADR) from JPY 23,600 (and USD 21.50 per ADR) but retain our wide-moat rating based on intangible assets, high switching costs, and cost advantages. As the world’s largest computer numerical control, or CNC, system and industrial robot manufacturer, with about 50% and 20% market shares, respectively, the company plays a critical role manufacturing automation that new entrants cannot easily replicate. Fanuc remains decent value in four-star territory at current prices.