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Morningstar | Nissan Reports Weaker Fiscal 1Q 2018 Results, Outlook Confirmed: Maintaining JPY 1,480 Fair Value

No-moat Nissan reported first-quarter fiscal 2018, ended June 30, diluted earnings per share of JPY 29.62, beating the consensus of JPY 24.07 by JPY 5.55, but JPY 4.87 lower than the JPY 34.49 EPS reported last fiscal year. While consolidated revenue slid by 2%, operating profit margin contracted 160 basis points to 4.0%. The stock currently trades at a 30% discount to our JPY 1,450/$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.

Fiscal first quarter 2018 consolidated revenue decreased 2% to JPY 2,716.6 billion from JPY 2,760.4 reported last year. However, consolidated operating profit before special items declined by 29% to JPY 109.1 billion compared with JPY 153.3 billion in fiscal 2017. Nissan’s fiscal first quarter was adversely impacted by higher raw material costs, higher research and development expense, unfavorable currency translation, an unfavorable product mix, costs associated with the emissions final inspection scandal in Japan. Despite lower operating profit, U.S. tax reform partially offset the fiscal quarter's headwinds, resulting in a 14% decline in net income JPY 115.8 billion versus the JPY 134.9 billion reported in the same period last year.

Management guidance for fiscal year 2018 ending March 31, 2019, includes 3% increase in retail volume to 5.9 million units, a slight 0.4% rise in revenue to JPY 12.0 trillion, but a 6% reduction in operating profit to JPY 540 billion with 30 basis points of margin contraction to 4.5%. The major contributor to the decline in forecast operating profit is management’s estimate for a JPY 135 billion hit from negative currency translation. While the company expects JPY 144 billion in positive operating performance, other fiscal 2018 headwinds include JPY 44 billion incremental research and development expense and JPY 80 billion from higher raw material costs.

We model a 3% decline in volume and 4% reduction in automotive revenue. We assume greater reduction in fleet versus retail volume in our model, and negative currency translation that reduces revenue by 1 percentage point more than the decline in volume. We also assume slightly more margin contraction than management, resulting in our estimated JPY 514 billion operating profit at a margin of 4.4% as we discount management's operating performance forecast for the emissions final inspection scandal in Japan and slightly less mix improvement 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 year 2015), negative 1.6% (fiscal year 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 4.3%, 50 basis points below Nissan's 10-year median. Despite our conservative Stage I forecast, our JPY 1,480 fair value estimate represents 22% upside to current JPY 1,211 consensus price target and 42% appreciation potential from the current market price.