Panasonic: Look Beyond Operating Income Miss

seekingalpha05-15

Panasonic's recent FY 2024 operating income missed the consensus estimate by -9.6%, but this is already reflected in the stock's undemanding valuation multiples.More importantly, there are valuation ...

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Panama7/iStock Editorial via Getty Images Elevator Pitch I have a Buy investment rating for Panasonic Holdings Corporation stock (OTCPK:PCRFF) (OTCPK:PCRFY) [6752:JP]. My opinion is that investors should look beyond Panasonic's operating profit miss for the recent fiscal year. Instead, the focus should be on the stock's valuations and the company's long-term prospects. I still rate Panasonic as a Buy. There is the potential for Panasonic to command higher valuations, when the company makes good progress with its portfolio restructuring efforts and plans to expand its EV (Electric Vehicle) battery business. The company's shares are traded on the Japanese equity market and the Over-The-Counter market. The trading liquidity for Panasonic's OTC shares is low. But readers have the choice of investing in Panasonic's shares listed on the Tokyo Stock Exchange, which have good trading liquidity, with US stockbrokers such as Interactive Brokers. As per S&P Capital IQ data, the three-month mean daily trading value for Panasonic's Japan-listed shares was reasonably high at $80 million. Company's Financial Performance And Portfolio Optimization Progress Have Disappointed Investors Panasonic's Japan-listed shares dropped by -4.7% on May 10, 2024, a day after the company reported its full-year FY 2024 (YE March 31) financial results. A year ago, I determined that above-expectations financial results and favorable corporate restructuring moves were needed for a positive re-rating of Panasonic's shares in my May 2, 2023 article. These are exactly the areas where the company has fallen short of the market's expectations, as evidenced by its latest disclosures. The company registered an operating income of JPY361 billion for the year between April 1, 2023 and March 31, 2024 or fiscal 2024. Panasonic's actual FY 2024 operating earnings came in -9.6% (source: S&P Capital IQ) and -9.7% lower than the analysts' consensus forecast and the company's earlier February 2024 guidance (JPY400 billion), respectively. In its FY 2024 earnings presentation slides, Panasonic explained that \"investments in Energy (segment) for business growth\" and \"the impact of inflation\" had hurt its operating profit for the recent fiscal year. PCRFF revealed in its results presentation that its operating costs grew by JPY40 billion due to inflationary pressures in FY 2024, while its operating income took a JPY50 billion hit from \"strategic investments\" for the Energy segment in the latest fiscal year. Separately, Panasonic indicated at its FY 2024 analyst briefing on May 9 that \"portfolio management is underway\" in response to an analyst's comment that the company's \"structural reform and internal effort\" relating to the \"business portfolio\" don't appear \"to be bearing fruit.\" Moving ahead, PCRFF is guiding for a ROE of 7.0% for full-year fiscal 2025. This is lower than both the company's intermediate-term ROE goal of 10.0% outlined at its prior April 2022 investor meeting and its actual FY 2024 ROE of 10.9%. As evidenced by the company's modest ROE target, Panasonic is unlikely to achieve a substantial improvement in financial performance and significant progress with portfolio optimization for the near term. Nevertheless, I remain bullish on Panasonic, considering the stock's appealing valuations and the company's prospects for the long run as detailed in the next section. But Current Valuations Are Undemanding And Haven't Factored In Long-Term Positives I am of the opinion that Panasonic's current valuations have already priced in the company's FY 2024 operating income miss, and its slow progress pertaining to portfolio restructuring. More importantly, there is substantial valuation re-rating potential for the stock in the long term. Panasonic is now trading at 0.67 times trailing P/B, 4.3 times consensus next twelve months' EV/EBITDA, and 0.41 times consensus next twelve months' Enterprise Value-to-Sales as per S&P Capital IQ valuation data. It will be fair to say that Panasonic's valuations are undemanding. The stock's Enterprise Value-to-Sales and P/B metrics are below 1 times, while the market values Panasonic at a low-to-mid single digit EV/EBITDA multiple. Also, the company is essentially trading off short-term pain for long-term gains. In the preceding section, I mentioned that Panasonic's \"investments in Energy for business growth\" was one of the key factors contributing to its operating profit miss for the recent fiscal year. PCRFF has been investing in its Electric Vehicle or EV battery business (part of the Energy segment), or \"ramping up the new (EV battery) factories in Wakayama and Kansas\", as disclosed in its earnings presentation. This represents short-term pain for Panasonic in the form of an increase in investments and costs. On the flip side, Panasonic could potentially enjoy long-term gains in the form of higher top line and operating earnings contributions from the EV battery business in the long run. Specifically, the company is targeting to increase the revenue derived by its in-vehicle or EV battery business from JPY650 billion in FY 2023 to JPY2.5 trillion by FY 2031, which will be supported by the investments in the new factories as mentioned above. On the other hand, Panasonic is already contemplating portfolio optimization moves that might drive higher earnings and ROE improvement in the future. At its FY 2024 analyst call, PCRFF highlighted that a potential \"portfolio management\" initiative is to have its \"ProAV\" (Professional Audio Visual) and \"digital camera\" businesses \"be coordinated together.\" As per the chart presented below, Panasonic is a conglomerate with a diverse mix of businesses. Therefore, there are naturally opportunities to unlock synergies between its various businesses such as the example it provided. Panasonic's Different Businesses At A Glance Panasonic's FY 2023 Annual Report My view is that Panasonic is undervalued with a favorable outlook for the long run relating to its EV battery business and portfolio restructuring opportunities. Key Risk Factors To Watch There are two major risks associated with Panasonic. Firstly, a slower-than-expected adoption rate of EVs in the years ahead could mean that the company's EV battery business fails to meet its FY 2031 revenue target. Secondly, a longer time taken to restructure and optimize its portfolio of businesses will affect Panasonic's valuation re-rating potential in an unfavorable manner. Closing Thoughts I stay bullish on Panasonic. The company's below-expectations operating income for the latest fiscal year was disappointing. But the stock's valuations are inexpensive, and I have confidence in PCRFF's long-term outlook.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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