EUR 850.00 For Business Accounts Only

Morningstar | NSANY Updated Forecasts and Estimates from 16 Apr 2019

No-moat Nissan reported third-quarter fiscal 2018, ended Dec. 31, diluted earnings per share before special items of JPY 18, missing the consensus of JPY 32.18 by JPY 14.18, and JPY 24.14 lower than the JPY 42.14 EPS reported last fiscal year. Consolidated revenue and unit volume increased 6% and 5%, respectively, while operating profit margin expanded 50 basis points to 3.4%. The stock currently trades at a 38% discount to our JPY 1,480/$26 fair value estimates. We think the 4-star-rated shares of Nissan represent attractive value for investors relative to our expectations for cash flow and returns on invested capital.

Consolidated revenue increased 6% to JPY 3,045.7 billion from JPY 2,875.5 billion reported last year. However, consolidated operating profit increased by 25% to JPY 103.3 billion compared with JPY 82.4 billion a year ago. Nissan’s fiscal third quarter was adversely affected by inventory destocking in the U.S., WLTP in Europe, higher raw material costs, and unfavorable currency translation. Nissan has been taking actions to improve the quality of sales, especially in the U.S., cutting retail incentives and reducing sales to rental fleet operators. Consequently, North America operating profit rebounded dramatically by 75% to JPY 29.5 billion compared with JPY 16.9 billion in the same period last year.

Management reduced guidance for fiscal 2018 ending March 31, 2019. Lower guidance represents a 3% volume decrease to 5.6 million units, a 4% revenue slump to JPY 11.6 trillion, and a 22% reduction in operating profit to JPY 450 billion with 90 basis points of margin contraction to 3.9%, all relative to fiscal 2017 results. The major contributor to the forecast profit decline is management’s estimate for 325,000 fewer units (versus prior guidance) on softer sales in the U.S., Europe, and China. The company expects JPY 130 billion in negative operating leverage relative to prior guidance plus negative JPY 20 billion from higher raw material costs.

We had already been forecasting JPY 11.6 billion in fiscal 2018 consolidated revenue. We assume greater reduction in fleet versus retail volume in our model, and negative currency translation that reduces revenue by 1.2 percentage points relative to the percentage change in unit volume. We had also assumed slightly more margin contraction than management's previous guidance, but we did reduce our estimate to JPY 442 billion, from JPY 519 billion, operating profit as we discount management's performance for unfavorable operating leverage as well as raw material cost headwinds versus fiscal 2017.

During the past 10 years, Nissan's consolidated operating profit margin has had a high, low, and median of 5.9% (fiscal 2015), negative 1.6% (2008), and 4.8%, respectively. We estimate margin expansion to 4.9% at the midpoint of our five-year Stage I forecast, before contracting in years four and five into a normalized sustainable midcycle operating margin of 4.2%, 60 basis points below Nissan's 10-year median. Despite our conservative Stage I forecast, our JPY 1,480 fair value estimate represents 41% upside to the current JPY 1,048 consensus price target, and 59% appreciation potential from the current market price.