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Morningstar | Nissan's Fiscal 2018 Results Weak, 2019 Outlook Disappointing; Maintaining JPY 1,480 FVE

No-moat-rated Nissan reported diluted earnings per share of JPY 81.59 for fiscal 2018, ended March 31, missing the JPY 102.32 consensus by JPY 20.73 but just shy of our JPY 82.00 EPS estimate. Consolidated revenue and unit volume declined 3.2% and 4.4%, respectively, while operating profit margin contracted 210 basis points to 2.7%, slightly better than our 2.4% estimate. The stock currently trades at a 43% discount to our JPY 1,480 ($26) fair value estimates. We think the 5-star-rated shares of Nissan represent compelling value for long-term investors relative to our expectations for cash flow and returns on invested capital.

While consolidated revenue declined 3.2%, consolidated operating profit plunged 44.6% to JPY 318.2 billion compared with JPY 574.8 billion (excluding U.S. tax gain of JPY 231.8 billion) a year ago. Nissan’s fiscal 2018 was adversely affected by inventory destocking in the U.S., the WLTP standard in Europe, increased spending for warranty, higher raw material costs, and unfavorable currency translation. Nissan has been taking actions to improve the quality of its U.S. sales, cutting incentives and reducing rental fleet volume. Consequently, North America operating profit plummeted 64% to JPY 72.1 billion from JPY 200.0 billion last year.

While management's fiscal 2019 guidance was disappointing, its transformation plan through fiscal 2022 was slightly more optimistic than our current Stage I forecast. Management expects annual revenue increases from fiscal 2020 to 2022 and a fiscal 2022 operating margin of greater than 6.0%, down from its previous 8% long-term target. Even so, we assume roughly flat revenue during our Stage I forecast with a 5.4% peak consolidated operating margin in fiscal 2020, declining to a 4.1% normalized sustainable midcycle. When we roll our model for the new fiscal year, we expect to maintain our fair value estimate, with the time value of money being offset by lower revenue and margin in fiscal 2019.

Management guidance for fiscal 2019 includes a 0.4% increase in unit volume and revenue down 2.4%. Operating profit guidance is JPY 230 billion, down 27.7% from fiscal 2018 results, with 70 basis points of margin contraction to 2.0%. The major contributor to the forecast profit decline is management’s estimate for 6.5% and 6.7% drops in U.S. and Europe retail sales volume, respectively, versus the prior fiscal year. The company expects JPY 200 billion in profit reduction relative to the prior fiscal year from negative currency fluctuation (about JPY 40 billion), increased spending on powertrain electrification as well as advanced driver-assist technology (about JPY 110 billion), and higher raw material costs and tariffs (about JPY 50 billion). Negative operating leverage is expected to be partially offset by JPY 112 billion in cost-saving initiatives.

During the past 10 years, Nissan's consolidated operating profit margin, including financial services, has had a high, low, and median of 6.5% (fiscal 2015), negative 1.6% (fiscal 2008), and 5.3%, respectively. We estimate margin expansion will be 5.4% at the midpoint of our five-year Stage I forecast before contracting in years four and five to a normalized sustainable midcycle consolidated operating margin of 4.1%, 120 basis points below the 10-year median. Despite our conservative Stage I forecast, our JPY 1,480 fair value estimate represents 58% upside to the current JPY 936 consensus price target and 76% appreciation potential from the current market price.