FANUF - Fanuc Corporation: Watch Capital Return And Financial Prospects

2024-01-09 08:03:46 ET

Summary

• Fanuc Corporation pays out a reasonably high proportion (60%) of its earnings as dividends, and the company is targeting to achieve JPY50 billion of share repurchases for full-year FY 2023.
• The company's financial performance in the near term is likely to be poor due to destocking headwinds, and weak automation demand for the Chinese market.
• My investment rating for Fanuc Corporation stock is a Hold based on my assessment of the company's shareholder return and financial outlook.

Elevator Pitch

I have a Hold rating for Fanuc Corporation ( FANUF ) [6954:JP]. Japanese company Fanuc Corporation calls itself "one of the worldwide leaders in factory automation for CNC control systems, robots and production machinery" in its media releases .

Fanuc Corporation is awarded a Hold rating taking into account the stock's valuations, the company's shareholder return, and its business outlook. The stock's +3.2% shareholder return yield is reasonably good which should limit the downside for its shares. On the other hand, Fanuc Corporation's capital appreciation potential is likely to be capped in view of the challenging prospects for its factory automation business.

Investors should note that the mean daily trading value for Fanuc Corporation's OTC shares for the past three months was reasonably decent at $10 million (source: S&P Capital IQ ). Readers can also trade in Fanuc Corporation's relatively more liquid Japanese shares (three-month average daily trading value of $110 million) listed on the Tokyo Stock Exchange with US stockbrokers.

Capital Return Initiatives Are Good

I have a favorable opinion of how Fanuc Corporation distributes the company's excess capital to its shareholders.

Fanuc Corporation's generous dividend payout is a key investment merit for the stock in my view. The company noted in its earlier October 31, 2023 announcement that it has "set a dividend payout ratio of 60% as our basic (shareholder capital return) policy." For the first half of fiscal year 2023 (April 1, 2023 to September 30, 2023), Fanuc Corporation paid out a dividend per share of JPY40.26 which is equivalent to a 60% payout ratio that the company has committed to.

The company's 60% dividend payout is high on both an absolute and a relative basis. As a rule of thumb, I typically view a "normal" dividend payout ratio for a listed company to be around 30%, so Fanuc Corporation's dividend payout is pretty high in absolute terms from my perspective. Also, S&P Global Market Intelligence issued a research report on Japanese companies' dividends on November 14, 2023 which showed that the median dividend payout ratio for Japan's listed firms in the Nikkei 225 Index was 33% for the most recent fiscal year.

Besides boasting an impressive dividend payout, Fanuc Corporation also has been actively repurchasing the company's own shares. Between April 1, 2023 and October 26, 2023, the company allocated JPY24.2 billion of its excess capital to share buybacks. Looking forward, Fanuc Corporation is aiming to spend JPY25 billion on share repurchases for the time frame between the beginning of November last year and the end of April this year.

In other words, the company might potentially execute on close to JPY50 billion of buybacks for full-year FY 2023. It is worth noting that Fanuc Corporation's actual amount of capital allocated to share repurchases for full-year FY 2022 (April 1, 2022 to March 31, 2023) was JPY24.2 billion , or about half of the company's targeted share buybacks in this fiscal year.

Considering the analysts' consensus FY 2023 dividend per share estimate of JPY77.2 (source: S&P Capital IQ ) and the JPY50 billion share buyback target, Fanuc Corporation's current fiscal year or FY 2023 shareholder return (sum of buybacks and dividends divided by market capitalization) yield is a pretty decent 3.2%.

Weak Automation Demand Poses Downside Risks For Short-Term Financial Performance

Fanuc Corporation is expected to announce the company's financial results for the third quarter of fiscal 2023 in the later part of this month, or January 26, 2024 to be specific as per S&P Capital IQ data.

The market currently sees Fanuc Corporation's top line and operating profit declining by -3% QoQ and -12% QoQ to JPY190.5 billion and JPY29.8 billion (source: S&P Capital IQ ), respectively in Q3 FY 2023. For full-year fiscal 2023, the analysts are projecting a -0.8% decline in EBIT for the company.

I hold the view that Fanuc Corporation's actual third quarter and full-year revenue and operating income could be below what the sell side is currently anticipating due to the negative effects of destocking and a lackluster automation demand outlook.

The company mentioned at its most recent quarterly (Q2 FY 2023) earnings call that "the pace of inventory adjustments is slower than expected and will take time" for its Factory Automation or FA business because "the Chinese economy is not in a good state." This implies that Fanuc Corporation is suffering from the unfavorable impact of destocking and the automation market demand in China is a major factor influencing the performance of its factory automation business.

According to a December 13, 2023 research report (not publicly available) titled "Pan-Asia 2024 – Key Investor Debates" published by Morgan Stanley ( MS ), the Chinese automation market is estimated to contract by -2% to RMB284 billion for this year. Morgan Stanley is anticipating a decline in automation demand in China due to "headwinds from the property market, LGFV (Local-Government Financing Vehicles) deleveraging, and weakening domestic consumption momentum" as outlined its mid-December report.

Closing Thoughts

My view of Fanuc Corporation's shareholder capital return is positive, but I am negative on the company's near-term prospects considering weak automation demand. Fanuc Corporation stock is also fairly valued based on a Price-to-Earnings Growth or PEG metric of 1.07 times (close to 1) based on a consensus forward FY 2024 P/E of 25.4 times and the consensus FY 2024-2025 EPS CAGR of +23.7% as per S&P Capital IQ data.

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