FANUY - Fanuc Corporation: Multiple Negative Surprises

Summary

• There were too many negative surprises associated with Fanuc Corporation's recent results announcement, such as an earnings miss, a guidance cut, and below-expectations performance for the Chinese market.
• But sell-side analysts covering Fanuc Corporation's shares remain confident in its future prospects, considering that the current consensus FY 2022 estimates are higher than what management guided for.
• I rate Fanuc Corporation's shares as a Sell, as there is a high probability of a further cut in consensus numbers, which will depress its share price.

Elevator Pitch

I have a Sell investment rating assigned to Fanuc Corporation's ( FANUY ) (6954:JP) stock.

Fanuc Corporation has disappointed investors with its recent quarterly operating income miss and downward revisions to its full year guidance. But FANUY's stock price could go lower going forward, considering that analysts haven't fully factored Fanuc Corporation's weaker guidance into their financial forecasts. As such, I choose to assign a Sell rating to Fanuc Corporation.

Fanuc's financial year ends on March 31. FANUY refers to fiscal 2022 as the financial year starting on April 1, 2022 and ending on March 31, 2023 in the company's reports, which is typically referred to as FY 2023 by other listed companies. Do note that I will be using the company's fiscal year definition for the purpose of this article.

Company Overview

Fanuc calls itself a company offering "industry-leading CNC (Computer Numerical Control) systems, robotics, and factory automation" in its media releases . FANUY also noted in its corporate profile booklet that the company was involved in "the development of NCs (Numerical Controls)" since 1955.

A Brief Description Of Fanuc Corporation's Key Businesses

The ROBOT, FA, ROBOMACHINE businesses contributed 38.1%, 27.1%, and 20.8% of Fanuc Corporation's fiscal 2021 revenue, respectively, as highlighted in the company's annual report . FANUY generated the remaining 14.0% of its topline in FY 2021 from services.

Recent Quarterly Operating Income Fell Short Of Expectations

Fanuc announced its most recent Q2 FY 2022 financial results (July 1, 2022 to September 30, 2022 period) on October 27, 2022.

Operating profit for Fanuc decreased by -9.7% QoQ from JPY49.8 billion in the first quarter of fiscal 2022 to JPY44.9 billion in the recent quarter. FANUY's actual Q2 FY 2022 operating income came in -16.0% below the analysts' consensus projection of JPY53.5 billion. In other words, this was a huge operating earnings miss for Fanuc in the most recent quarter.

In its Q2 FY 2022 earnings press release , Fanuc explained that the company was affected by multiple headwinds in the recent quarter such as "shortage in semiconductors and other components in the supply chain, accelerating inflation, and sudden fluctuations in foreign exchange rates."

Reduction In Full-Year Management Guidance

To make things worse, FANUY lowered its full-year FY 2022 guidance, on top of missing the market's expectations with regards to its Q2 FY 2022 operating profit.

Specifically, Fanuc Corporation revised its fiscal 2022 topline guidance by -2.4% from JPY825.7 billion previously to JPY805.7 billion now. The company also reduced its FY 2022 operating income guidance by -8.4% to JPY181.7 billion. This suggests that Fanuc expects its operating profit to contract by -0.8% in the current fiscal year.

China Market's Performance Was Another Negative Surprise

It is widely accepted that the second quarter of 2022 in calendar year terms (or Q1 FY 2022 for Fanuc Corporation) was the worst of pandemic-induced lockdowns in China. As such, investors were expecting some degree of improvement relating to FANUY's business operations in China. But the opposite turned out to be true.

Revenue for the company's ROBOMACHINE business segment dropped by -23.1% QoQ from JPY40.2 billion in Q1 FY 2022 to JPY30.9 billion for Q2 FY 2022. Fanuc Corporation's sales from its FA business segment also declined by -2.5% QoQ from JPY65.6 billion to JPY63.9 billion over the same period.

Fanuc had emphasized in its second quarter media release that it "anticipates the slowdown of demand for FA and ROBOMACHINES for the time being due to economic uncertainty in China." This is an acknowledgement that the weaker-than-expected performance of FANUY's business in China had led to its Q2 FY 2022 operating earnings miss and FY 2022 guidance cut.

China is a key market for Fanuc, as the country accounted for 33.1% of FANUY's total revenue for FY 2021 as disclosed in its annual report. Fanuc's substantial exposure to the Chinese market is a major concern. Assuming that China's economy remains weak going forward, Fanuc's actual financial performance might be even worse than what it guided for.

A High Likelihood Of Further Cuts To Consensus Numbers

It is also important to note that there is a significant disparity between Fanuc Corporation's updated management guidance and the company's current sell-side consensus financial projections.

Based on financial data obtained from S&P Capital IQ , the market's consensus FY 2022 topline forecast is JPY833 billion now, which is +3% higher than management's revenue guidance of JPY805.7 billion. Similarly, the current sell-side consensus fiscal 2022 operating income estimate of JPY 202 billion exceeds the company's operating profit guidance of JPY181.7 billion by as much as +11%.

This suggests that the sell-side analysts might be too optimistic and erroneously consider the company's management guidance to be overly conservative. In other words, there is room for further negative surprises leading to a round of rating downgrades and reductions in forecasts, assuming that Fanuc's Q3 FY 2022's results aren't as good as hoped for.

Closing Thoughts

I am of the view that Fanuc's shares warrant a Sell rating. There is more potential downside for FANUY's stock, as the weak financial outlook for the company hasn't been completely reflected in the sell-side's consensus figures. This suggests that there is a good chance of further valuation de-rating for Fanuc's shares, driven by a reduction in earnings forecasts and analysts' rating downgrades.

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