Yuichi Yamazaki
Elevator Pitch
Fanuc Corporation (OTCPK:FANUY) (OTCPK:FANUF) [6954:JP] is rated as a Hold.
Previously, I wrote about Fanuc Corporation’s shareholder capital return moves and the company’s short term headwinds in my January 9, 2024 article.
This latest update focuses on FANUY’s prospects for the near term and long run. On one hand, I have a pessimistic view of Fanuc Corporation’s upcoming quarterly results release in late April. On the flip side, I remain positive on the company’s long term growth outlook. My decision is to maintain my Hold rating for Fanuc Corporation.
Readers should be aware that Fanuc Corporation’s shares can be bought and sold on both the Over-The-Counter market and the Tokyo Stock Exchange. The three-month average daily trading values of the company’s Japan-listed and OTC shares were $110 million and $6 million, respectively as per S&P Capital IQ data. Investors can rely on US brokerages such as Interactive Brokers to deal in Fanuc Corporation’s Japan-listed shares.
Upcoming Fourth Quarter Results Might Be Disappointing
Fanuc Corporation is expected to report the company’s Q4 FY 2023 (January 1, 2024 to March 31, 2024) financial results in late April.
The sell side analysts see FANUY’s top line and operating income decreasing by -12% and -28% in the final quarter of the current fiscal year or FY 2023 (YE March 31, 2024). I take the view that Fanuc Corporation’s actual Q4 FY 2023 financial performance is likely to be as poor as what the market is anticipating or even worse.
One thing to consider is Fanuc Corporation’s management commentary at its Q3 FY 2023 results briefing.
Fanuc Corporation hosted its third quarter earnings call on January 26, 2024, when roughly a third of the new quarter has already passed, so the company’s management comments have relevant read-throughs for FANUY’s actual fourth quarter results.
At its Q3 FY 2023 earnings briefing, Fanuc Corporation indicated that “a decrease in sales can be expected” for Q4 FY 2023 assuming that the current “state of orders continue as it is.” FANUY also highlighted at the company’s most recent quarterly results briefing that the “inventory adjustment” process for its ROBOTs business segment will require at least another six months.
Another thing to watch is industry and economic metrics.
The YoY decline in the value of machine tool orders for the Japanese market worsened from -12.7% in December 2023 to -14.0% for January 2024. This is based on the latest data available from Japan Machine Tool Builders’ Association.
Separately, investors seemed to have turned more bearish on Japan’s economic outlook. In its latest March 2024 presentation, Sumitomo Mitsui DS Asset Management revised its 2024 real GDP growth estimate for the Japanese economy from +1.1% previously to +0.6% now.
An assessment of FANUY’s management comments and specific economic and industry figures suggests the company’s actual Q4 FY 2023 results release could possibly be a disappointment for investors.
Prospects For The Long Run Are Good
I have a positive opinion of Fanuc Corporation’s long term prospects, even though I am concerned that its Q4 FY 2023 results might miss expectations as mentioned in the previous section.
There are two major factors to consider when one analyzes FANUY’s prospects for the long run.
A key factor is innovation.
On March 6, 2024, Fanuc Corporation issued a media release disclosing that it was named as one of the “Top 100 Global Innovators” by Clarivate Plc (CLVT) in 2024 or for the third straight year running. According to this March 6 media release, CLVT’s ranking of worldwide innovators is done by reviewing “proprietary patent data” and assessing criteria like “number of patents acquired.”
Another indication of FANUY’s focus on innovation is the company’s meaningful investment in Research & Development or R&D. Fanuc Corporation’s R&D costs-to-revenue ratio was 5.9% for the first nine months of fiscal 2023 based on my calculations, or roughly on par with the company’s FY 2022 R&D expenses-to-sales ratio of 6.1%.
The other key factor is geographical diversification and expansion.
FANUY announced in late February this year that it “relocated and expanded FANUC IBERIA, its group company in Spain” to a new office that boasts a “floor space, which is four times larger than before.” Fanuc Corporation also revealed in this February 21, 2024 announcement that the company grew the size of its offices in 10 European markets in the last couple of years.
As indicated in its most recent quarterly earnings presentation slides, the revenue contribution of Fanuc Corporation’s home market decreased from 14.7% in Q3 FY 2022 to 13.4% for Q3 FY 2023. During the same period, the European market’s sales contribution rose from 17.5% to 21.5%. It is worth mentioning that FANUY noted at its Q3 FY 2023 earnings call that “orders for the automotive industry, mainly for EV (Electric Vehicle) related products” in Europe were a source of strength for the company. In other words, there has been strong product demand in Europe, and Fanuc Corporation has capitalized on that by expanding its presence in certain European markets.
In a nutshell, sustained innovation and geographical expansion can lay the foundation for Fanuc Corporation’s long term growth.
Concluding Thoughts
This isn’t the right time to turn bullish on Fanuc Corporation, as its Q4 FY 2023 results might be a negative surprise. However, FANUY’s long term outlook is still bright, so a Sell rating won’t be justified. As such, I stick to my Neutral view and Hold rating for Fanuc Corporation.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
