Report
Kazunori Ito
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Morningstar | Cutting Nidec FVE to JPY 18,000, but Long-Term Growth Story in Brushless DC Motors Is Intact

We are lowering our fair value estimate for Nidec to JPY 18,000 from JPY 20,000 as the impact of the ongoing economic slowdown is expected to be larger than our original forecast. However, we retain our long-term view that Nidec’s expertise in power-efficient motors will enable higher growth, benefiting from demand from data storage, autos, appliances, and robots. We have revised our fair value uncertainty rating to high from medium, considering Nidec's high revenue exposure to China. As mentioned in the recent profit warning, orders from China dropped significantly in November, and the company does not expect demand to recover in the short run because of the huge inventories in autos and home appliances. However, we are encouraged that (1) Nidec did not change its capital expenditure plan of JPY 150 billion for this fiscal year, implying strong confidence in future demand; (2) the company has already switched gears to focus on restructuring to improve its cost structure, which will help it achieve better profitability when demand returns; and (3) Nidec says orders for some appliances seem to bottom out in January. We forecast that Nidec’s profitability will recover in the second half of 2019, which is not embedded to the current share price.

Nidec plans to replicate the comprehensive restructuring program, WPR, which it implemented twice in fiscal 2009 and 2013. WPR targets to achieve the same operating margin even if the company loses 25% of its revenue. We are somewhat concerned that the benefit of the restructuring plan might be smaller this time, as Nidec possesses a much larger number of businesses than the past and thus may not able to control subsidiaries as effectively. Nidec’s revenue has doubled and it has acquired more than 20 business domains and companies overseas since 2013. However, we are encouraged by the swift action and the confidence of management at the earnings meeting.

Because of the ongoing inventory correction, we estimate that Nidec’s growth will be slower for approximately one year longer than our original numbers, which is the reason for cutting our fair value estimate. Our operating income forecasts for fiscal 2020 and 2021 are lowered from JPY 240 billion and JPY 280 billion to JPY 190 billion and JPY 240 billion, respectively. However, leveraging expertise and cost advantages of producing power-efficient motors, Nidec will continue to benefit from the high demand from various industries driven by strengthening environmental regulations, in our view.
Underlying
Nidec Corporation

NIDEC and its subsidiaries are primarily engaged in the design, development, manufacture and marketing of small precision motors, mid-size motors, machinery, electronic and optical components, and other products. Co.'s principal products are spindle motors for hard disk drives, motors for optical disk drives, small precision fans and other small motors; mid-size motors; test systems, measuring equipment, power transmission equipment, factory automation systems, card readers and industrial robots; camera shutters, camera lens units, switches, trimmer potentiometers, motor driven actuator units, processing and precision plastic mold products; and auto parts and pivot assemblies.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Kazunori Ito

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