14 Mar Another Look at Nidec
Another Look at Nidec
Nidec is near the top end of its valuation ranges, but to us it appears to be more speculative than inappropriately valued as some “activist” investors have implied. The company has been criticized for its active self-promotion and supposedly low-quality earnings, but we think the risks have more to do with uneven growth rates, unpredictable contributions from M&A and a possible decline in demand for HDD motors.
We see 40% downside risk to a ¥6,413 “no-growth valuation” calculated by Japan Analytics based on company’s trailing twelve month operating earnings. But sales should rise by nearly 20%, operating profit by 15% and net profit by 14% over the next two years. On this forecast, our model indicates 30% downside risk to ¥7,460. That is 18x our EPS estimate for FY Mar-19, compared with a 10-year P/E range of 11x – 38x.
Growth continues, largely due to M&A, while efficiency gains lift margins. The Company has a sound balance sheet and generally positive free cash flow. Over the past two years Nidec has made 10 acquisitions. Can they be efficiently assimilated? The share price is up 50% since last July and is approaching overbought levels. As quarterly profit comparisons improve with a weaker JPY, this looks like an opportunity to sell into strength ahead of the next acquisition.
Nidec has been criticized by “activist” investors who believe its valuations are unreasonable. The gist of their argument is that analysts and fund managers have become infatuated with the company’s charismatic CEO, Mr. Shigenori Nagamori, and its enthusiastic approach to investor relations, consequently ignoring the low quality of its earnings, highly optimistic sales and earnings guidance, aggressive accounting and questionable strategy of growth through acquisitions.
We think their complaints are well known (and most probably being constantly reviewed and discounted) and that the risks involved in owning or not owning the stock are, rather, uneven sales and profit growth, the possible collapse of demand for HDD spindle motors (17% of sales), unpredictable future contributions from M&A and the constant need to rationalize acquired companies in order to bring their operating profit margins up to Nidec standard (10% or more).
These risks are easily visible in the company’s financial statements: annual sales growth ranging from 1% to 23% in the past five fiscal years, an operating margin that peaked in FY Mar-11, ROE that is still below the level reached in FY Mar-10. In addition, there is Key Man Risk: the irreplaceable Mr. Nagamori is 72 years old.