2023-11-26 01:07:22 ET
Summary
- The consensus financial estimates for Fanuc Corporation have been revised downwards, despite the fact that the company's recent quarterly results were better than what the market anticipated.
- Inventory issues have led to concerns about FANUY's future orders and revenues, and this is the reason for the cut in consensus numbers for the company.
- I still award a Hold rating to Fanuc Corporation; FANUY isn't a Sell despite the inventory overhang, as I have a positive opinion of its Service business' growth potential.
Elevator Pitch
My investment rating for Fanuc Corporation ( OTCPK:FANUY ) [6954:JP] stock remains as a Hold.
Earlier, I touched on Fanuc Corporation's Q1 FY 2023 (YE March 31, 2024) financial performance and the ROBOT business segment's prospects in my September 7, 2023 article . In this latest update, I highlight how inventory issues are impacting Fanuc Corporation's outlook.
FANUY's orders and sales in the short term are expected to be negatively affected by excess inventories, so I don't think that Fanuc Corporation is worthy of a Buy rating. On the flip side, a Sell rating for FANUY is unwarranted, as the company's Service business has done well in the recent quarter and it has good growth potential for the long run. As such, I leave my existing Hold rating for Fanuc Corporation unchanged.
Fanuc Corporation's shares are listed on both the OTC (Over-The-Counter) market and the Tokyo Stock Exchange. The company's OTC and Japan-listed shares boast three-month average daily trading values of $7 million and $120 million, respectively as per S&P Capital IQ data. Readers who demand a relatively higher level of trading liquidity can choose to deal in Fanuc Corporation's Japan-listed shares using US brokerages offering international market access like Interactive Brokers.
Inconsistency Between Quarterly Results Beat And Downward Revision In Consensus Estimates
Fanuc Corporation's most recent quarterly top line and operating income came in above the sell-side analysts' consensus estimates, but this didn't translate into positive expectations of FANUY performing better in the future.
Nearly a month ago, Fanuc Corporation announced the company's financial results for the second quarter of fiscal 2023 (July 1, 2023 to September 30, 2023) on October 31. The company's Q2 FY 2023 revenue of JPY196.9 billion was +1.7% better than the market's consensus forecast of JPY193.7 billion as per S&P Capital IQ consensus data. The YoY top line contraction for FANUY also moderated from -4.6% for Q1 FY 2023 to -3.7% in Q2 FY 2023.
Fanuc Corporation achieved a +10.2% EBIT beat (source: S&P Capital IQ ) for the most recent quarter. FANUY's EBIT decreased by -24.4% YoY to JPY33.9 billion for Q2 FY 2023, but this was an improvement as compared to the company's -34.5% YoY EBIT decline in Q1 FY 2023.
Notably, the analysts continued to cut their financial forecasts for FANUY, notwithstanding the company's above-expectations Q2 FY 2023 performance.
FANUY's consensus full-year fiscal 2023 top line projection was reduced from JPY775.8 billion as of October 31, 2023 to JPY773.1 billion now, according to data taken from S&P Capital IQ . Also, the consensus FY 2023 revenue estimate for Fanuc Corporation has been lowered by -7.1% since the beginning of this fiscal year.
The current consensus FY 2023 EBIT projection for Fanuc Corporation is JPY126.3 billion (source: S&P Capital IQ ). This translates to a -1.5% decrease in EBIT for the full year and is lower than the company's prior consensus EBIT forecast of JPY128.8 billion as of end-October. In fact, FANUY's consensus EBIT estimate for this fiscal year was cut by -34.2% since April 1, 2023.
The inconsistency between FANUY's Q2 FY 2023 results beat and the downward revision in the company's consensus forecasts can be explained by inventory issues as detailed in the next section.
Excess Inventories Have Led To Lower Orders
Total orders for Fanuc Corporation dropped by -22.1% YoY from JPY217.0 billion in Q2 FY 2022 to JPY169.1 billion for Q2 FY 2023, as indicated in FANUY's recent quarterly earnings presentation slides . Specifically, Fanuc Corporation's orders for the key ROBOT and FA (Factory Automation) business segments decreased by -34.0% YoY and -19.0% YoY to JPY70.7 billion and JPY42.8 billion, respectively, in the latest quarter.
At the company's Q2 FY 2023 results briefing , FANUY noted that "inventory adjustments are still continuing for" the FA business segment with the Chinese market contributing "the majority of FA inventory." Note that China is a significant market for Fanuc Corporation accounting for more than a fifth of the company's most recent quarterly sales. Separately, Fanuc Corporation also mentioned at its latest second quarter results call that "the inventory of ROBOT (segment) has increased in overseas group companies." Fanuc Corporation's recent management commentary helps to explain why the company's orders have been on the decline.
The outlook for Fanuc Corporation isn't encouraging. FANUY guided that its orders for the third and fourth quarters of the current fiscal year will be roughly similar to what the company achieved for Q2 FY 2023. In other words, the company's management doesn't expect an improvement in orders in the near term.
To make things worse, FANUY didn't rule out the possibility that inventory issues could still be a headwind for the company in the following fiscal year or FY 2024 (March 31, 2024 to April 1, 2025). In response to a question regarding whether "a risk that channel inventory will generate uncertainty in next year's forecast" at the Q2 earnings call, Fanuc Corporation acknowledged that "such risks certainly exist." It is worth highlighting that the sell side's consensus FY 2024 EBIT projection was revised downwards by -2.9% from JPY169.2 billion to JPY164.3 billion after FANUY reported its recent set of quarterly results.
In a nutshell, if companies continue to pull back on capital expenditures in a tough economic environment, the pace of inventory clearance or reduction could be slower than expected, and this might translate into a decline in orders and lower revenue for Fanuc Corporation.
Service Business Has Good Growth Potential
The prospects of FANUY's Service business segment for the long run are good, even though the short-term outlook for the company as a whole is poor as highlighted in the preceding section.
In the latest quarter, Fanuc Corporation's Service business saw orders grow by +11.2% QoQ and +15.2% YoY to JPY23.2 billion. In fact, the company's Service division was the only segment to register a positive YoY growth in orders for the most recent quarter.
At its second quarter earnings briefing, Fanuc Corporation shared that the company is "increasing the sales of Service (business segment)" by "recommending maintenance agreements which are beneficial to customers and conducting preventive maintenance." In other words, FANUY's efforts to boost the performance of its Service segment have paid off as evidenced by this division's good results in Q2.
There is room for the Service segment to grow further in the future. Service accounted for a relatively small proportion or 16.7% of FANUY's Q2 FY 2023 revenue. The Service business' revenue is expected to grow in tandem with the expansion of the company's installed base of factory automation machinery and robots going forward. An increase in the number of robots and machinery sold by FANUY translates into greater demand for the company's maintenance and other related services.
Final Thoughts
Fanuc Corporation's shares continue to be rated as a Hold. FANUY's near-term prospects are unfavorable due to inventory issues. But a bright spot for the company is its Service business which achieved positive growth in the latest quarter despite challenging economic conditions.
For further details see:
Fanuc: Inventory Overhang In The Spotlight