2023-05-02 15:34:38 ET
Summary
- One potential catalyst for Panasonic Holdings Corporation is the divestment of the company's low-margin businesses such as Automotive in the future.
- Panasonic's other catalyst relates to a potential positive earnings surprise when the company announces its Q4 FY 2023 earnings next week on May 10 post-market.
- In consideration of the 2 potential re-rating catalysts for the stock, I leave my Buy rating for Panasonic unchanged.
Elevator Pitch
I continue to rate Panasonic Holdings Corporation (PCRFF) ( PCRFY ) [6752:JP] as a Buy. I previously highlighted that Panasonic's shares were undervalued in my prior update for the stock written on January 30, 2023 .
My attention turns to the potential catalysts that might allow Panasonic to trade at a higher valuation multiple and drive the company's share price up in the current article. The key catalysts for Panasonic are an earnings beat for Q4 FY 2023 (YE March) and the sale of its Automotive business, which I think are likely to be realized based on my analysis. I am sticking to a Buy rating for Panasonic based on the assumption that these two catalysts have a reasonably high probability of materializing.
Investors should note that both Panasonic's shares listed on the OTC market and the Tokyo Stock Exchange have reasonably good trading liquidity. The three-month mean daily trading values for Panasonic's OTC and Japan-listed shares were over $1 million (source: S&P Capital IQ ) and more than $60 million, respectively. Readers can deal in Panasonic's more liquid shares traded on the Tokyo Stock Exchange with the 6752:JP ticker using stock brokerages like Interactive Brokers.
Portfolio Optimization Opportunity For Panasonic Lies With Automotive Business Segment
A number of Japanese conglomerates have been very aggressive in executing on various value-accretive corporate actions to optimize their portfolios to reduce the holding company valuation discount assigned to their companies' shares. One notable example is Hitachi, Ltd. ( HTHIY ) [6501:JP]; I mentioned in my May 1, 2023 article for HTHIY that Hitachi recorded divestiture gains amounting to almost JPY300 billion in the most recent fiscal year and noted that HTHIY still has plans to sell stakes in other entities.
Panasonic is expecting its Automotive business segment to achieve an operating profit margin of 0.9% for FY 2023 as per the company's full-year fiscal 2023 (April 1, 2022 to March 31, 2023) financial guidance disclosed in its Q3 FY 2023 results presentation . In comparison, Panasonic's Industry, Energy, Lifestyle, and Connect business segments are projected to deliver relatively better operating margins of 6.1%, 3.8%, 3.4%, and 1.4%, respectively, for this fiscal year. It is apparent that the Automotive business segment is a weak spot for Panasonic.
It is easy for Panasonic to follow in fellow Japanese conglomerate Hitachi's footsteps and sell its underperforming businesses. Panasonic's management commentary at the most recent Q3 FY 2023 earnings call indicate that there is a good chance of the company parting ways with its Automotive business sometime down the road. Specifically, Panasonic revealed at the Q3 FY 2022 results briefing that it "would be looking at ROIC (Return On Invested Capital) and operating cash flow and other factors in assessing the portfolio of each operating company" with "a possibility of this top-down portfolio revision from the holding (company's) point of view."
The potential divestment of Panasonic' Automotive business segment will help to improve the business and revenue mix for the company with a larger proportion of the company's sales derived from higher-margin businesses that are still retained within the group.
Panasonic Could Deliver Upside Surprises With Earnings Announcement Next Week
Panasonic is expected to report the company's Q4 FY 2023 and full-year FY 2023 financial results in the following week on next Wednesday, May 10, 2023 , after the market close. Specifically, the company's Energy and Connect business segments have the potential to surprise the market in a positive manner.
With my earlier January 30, 2023, write-up for Panasonic, I highlighted the possibility of Panasonic's Energy business receiving as much as $3 billion or JPY400 billion of tax credits (based on sell-side's estimates) relating to the Inflation Reduction Act or IRA, which wasn't factored into PCRFY's FY 2023 guidance.
South Korea's LG Energy Solution [373220:KS], which is also engaged in the production of lithium-ion batteries just like PCRFY's Energy business, announced that it had registered an operating income of KRW633 billion for Q1 2023 (YE December) which exceeded the market's consensus estimate of KRW497 billion (source: S&P Capital IQ ) by +27%. The key reason for LG Energy Solution's substantial operating earnings beat was a KRW100.3 billion IRA tax credit recognized in the recent quarter, as indicated in an April 7, 2023 Bloomberg news article . As such, there is a reasonably good chance of Panasonic announcing above-expectations Q4 FY 2023 results and FY 2024 guidance, taking into account the recognition of IRA tax credits just like its peer LG Energy Solution.
Separately, Panasonic might not have written down the value of its 100%-owned subsidiary, Blue Yonder, for Q4 FY 2023, which is grouped under the company's Connect business segment. An April 23, 2021 Seeking Alpha News article noted that PCRFY bought the remaining 80% shareholdings interest in "supply chain software developer Blue Yonder for $7.1B" in 2021, which was referred to Panasonic's "largest acquisition in a decade."
Similar to many mega M&A deals, the takeover of Blue Yonder hasn't worked out that well for Panasonic. Blue Yonder reversed from a positive operating income of +JPY6 billion in Q1 FY 2023 (April 1, 2022 to June 30, 2022) to realize an operating loss of -JPY11 billion for Q2 FY 2023. But Panasonic subsequently appointed a new CEO to lead Blue Yonder starting in July 2022, as mentioned at the company's Q2 FY 2023 results call .
This management change appeared to have helped to improve the business performance of Blue Yonder, as Blue Yonder engineered a successful turnaround with an operating profit of +JPY20 billion for Q3 FY 2023. Under the leadership of the new CEO, Blue Yonder's share of higher margin and recurring SaaS (Software-As-A-Service) revenue as a proportion of total sales rose from 37.0% in Q3 FY 2022 and 41.1% in Q2 FY 2023 to 44.5% for Q3 FY 2023, suggesting that Blue Yonder's revenue quality had improved. This means it is now less likely that Panasonic will have had to recognize asset write-downs for Blue Yonder in Q4 FY 2023, which suggests that PCRFY's fourth quarter earnings might surprise on the upside.
Concluding Thoughts
Panasonic Holdings Corporation's shares are still trading below book value as per S&P Capital IQ's valuation data, and I believe that the stock can eventually be valued by the market at above book value when key re-rating catalysts are realized. In that respect, I see little reason to change my existing Buy rating for Panasonic Holdings Corporation.
For further details see:
Panasonic: 2 Potential Catalysts To Consider