Alps Alpine Trying To Execute A Difficult Transition To Higher Margin Products

seekingalpha08-20

Recent results beat expectations, with revenue 7% reported revenue growth and margin improvement, leading to increased revenue guidance for the year.Alps should get a near-term boost from phone camera...

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Higher Margin Products\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-20 09:59 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715748-alps-alpine-stock-trying-execute-difficult-transition-higher-margin-products-reiterate-buy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Recent results beat expectations, with revenue 7% reported revenue growth and margin improvement, leading to increased revenue guidance for the year.Alps should get a near-term boost from phone camera...</p>\n\n<a href=\"https://seekingalpha.com/article/4715748-alps-alpine-stock-trying-execute-difficult-transition-higher-margin-products-reiterate-buy\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE000ITXATA3.USD","symbol_name":"PIMCO BALANCED INCOME AND GROWTH \"M\" (USD) 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ACC","IE0004445015.USD":"JANUS HENDERSON BALANCED \"A2\" (USD) ACC","IE000W1ABFV2.USD":"PIMCO BALANCED INCOME AND GROWTH \"R\" (USD) INC","ST":"Sensata Technologies Holding","LU0011850046.USD":"贝莱德全球长线股票 A2 USD","IE0009G5SDU7.USD":"PIMCO BALANCED INCOME AND GROWTH \"M\" (USD) INC","IE00B19Z8X17.USD":"FTGF CLEARBRIDGE US LARGE CAP GROWTH  \"AG\" (USD) ACC"},"translate_title":"Alps Alpine试图向利润率更高的产品艰难转型","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"APELY":1,"TTDKY":1,"ST":1,"APELF":1},"content_text":"Recent results beat expectations, with revenue 7% reported revenue growth and margin improvement, leading to increased revenue guidance for the year.Alps should get a near-term boost from phone camera actuator demand, as Chinese rivals seem to be struggling to ramp up for 2024 smartphone launches.Management has struggled to translate technology and market leadership into growth or margins, but is launching a far-reaching restructuring program meant to improve growth and margins.Alps Alpine is exiting less attractive businesses and looking to refocus around its strengths in actuation and sensing, including advanced auto in-cabin offerings and new sensing products for industrial automation.Low single-digit growth can support a double-digit return; expectations are low and skepticism is high, but if this strategic repositioning works, the shares could have meaningful upside.   Just_Super Japan’s Alps Alpine (6770.T) (OTCPK:APELY) (OTCPK:APELF) has long been a confounding company to analyze, as this company has long struggled to translate market leadership in a range of sensors, actuator, switch, and display technologies into attractive and sustainable growth or margins – even with the company leading in areas like smartphone camera actuators, tactile switches for products like hearing aids, autos, and gaming systems, throttle position sensors, and so on, the company has only managed low single-digit long-term revenue growth (around 2%) and lackluster margins and free cash flow generation. Since my last update, the local shares are up about 12% (with the ADRs closer to flat due to currency), outperforming comps/peers like Sensata (ST), but underperforming MinebeaMitsumi (MNBEY) (6479.T) and TDK (OTCPK:TTDKY)(6762.T). While revenue has outperformed expectations, margins have come in much weaker than expected, leading management to launch a fairly comprehensive restructuring program aimed at lowering costs, culling lower-margin products, and refocusing on higher-margin opportunities. The best thing I can say about the shares today is that expectations are very low, particularly relative to the company’s market shares in many of its core markets. Long-term revenue and FCF growth of only 2% to 3% (which would basically assume no improvements from restructuring efforts) can drive reasonable upside from here, but investors need to be aware of the risk that the business is just structurally not capable of generating attractive margins and that the shares could languish as a result. Better Than Expected Results Against A Lower Bar Alps Alpine did report better than expected results for the most recent quarter (the fiscal first quarter), but it’s worth noting that expectations had come down substantially over the prior year. Still, a beat is better than a miss, even though management’s guidance revision didn’t indicate any expected upside for operating profits. Revenue rose 7% from the year-ago period as reported, but fell 3% in constant currency terms. Alps saw reasonably good growth from its mobile business (more on this later), and decent results from auto, while consumer was a bit weaker than expected. By segment, the Module and Systems business grew 3%, Components grew 18%, and Sensor & Communications grew 4%. Gross margin improved about two points (to 17.8%), and operating income reversed a year-ago loss and came in at JPY 1.2B, beating expectations of 0.4B. The Components business was the main driver of profitability, with segment profits up 373% and margin up more than seven points to 9.8%. Sensor & Communications reversed a year-ago loss (with a 0.5% margin), while Modules saw a larger loss (a negative 4.5% margin versus negative 2.2% a year ago). These results led management to boost first half revenue expectations by 8% and full-year expectations by about 1% (to JPY 925B), while the full-year operating income target remained unchanged at JPY 23B (or a 2.5% margin). Near-Term Opportunities In Mobile, But Competition Is Making This A Tougher Business First quarter results were boosted by better-than-expected results from the company’s camera actuator business for smartphones, and this also drove the first half guidance revision. While Chinese rivals have been gaining share at Alps’s expense for a few years, apparently they are having difficulties scaling up production for the 2024 line of new smartphones. Better still, with capacity limited, it appears that Alps Alpine is getting little-to-no pushback on price hikes (certainly not a typical situation for providers to companies like Apple (AAPL) that are helping the company belatedly offset inflationary cost pressures. While this is certainly a positive in the near term, phone camera actuators don’t appear to really be a major part of the company’s long-term improvement plan. The business isn’t going away, and I don’t believe management is looking to deprioritize it, but for the foreseeable future it seems as though camera features have plateaued and there’s not as much opportunity for Alps to differentiate itself from cheaper Chinese alternatives, particularly with OEMs switching away from products like OIS camera actuators with distance functions in favor of periscope lenses. Looking To Leverage Its Capabilities Into Higher-Growth, Higher-Margin Opportunities Earlier this year, management rolled out a plan that they hope will drive sustainable and meaningful improvement in the company’s growth and profitability, including a target return on equity of 10% or more (relative to near-term expectations around 5% for FY’26 and FY’27). The major features of this plan include broad cost reductions (including product development/launch costs and workforce reductions) and a reprioritization of the company’s product strategy. Management has already moved to exit under-earning product categories like airbag sensors and touch panel films, and will also be looking to selectively exit some business within auto seat/door and instrument panel lines. The idea here is basically just addition by subtraction – getting out of businesses that aren’t making profits, let alone earning their cost of capital. In addition to exiting under-earning lines, management wants to refocus around its strengths in actuation, sensing, imaging processing, sound, and software. In the Component segment, that means an increased focus on gaming, with management explicitly looking to make gaming (“Amusement” as they call it) a third pillar of the business after auto and mobile. In addition to established strength in areas like haptic actuators (which give tactile feedback through game controllers) and multifunction input devices, management is looking to develop products for the emerging/growing VR/AR market. In Sensor and Communications, management is still looking to leverage its capabilities in mmWave sensing to win share with occupant detection and peripheral object detection in autos, as well as wireless control (opening/closing doors remotely). Management is also looking to take its core competencies in sensing and start gaining share in markets like robotics – advanced robots increasingly rely on more advanced sensing to optimize positioning and flexibility, and sensitive sensors are vital for not only more intricate tasks, but also enabling robots that are safe to work around human beings (robots that can detect a human in its operating area and stop what they’re doing). Alps is also looking to leverage its sensing and communications capabilities into areas like logistics and asset tracking – I like this idea conceptually, but Sensata has tried this and gained relatively little traction with it. With the Module and System segment, management remains focused on its digital cockpit ambitions. For better or worse, this is largely a reiteration of what has long been a strategic priority for management – leveraging its capabilities in sensing, actuation, and human-machine interfaces to develop not just auto infotainment systems, but comprehensive in-cabin systems that monitor occupants (including condition sensing like a driver nodding off or someone sitting in a way that could alter an airbag’s performance) and respond accordingly. The Outlook Conceptually, I can’t fault Alps’s new strategy – I mean, what’s the argument for staying in businesses where they can’t earn a reasonable profit and that are only becoming more commoditized? Likewise, looking for new, higher-value market opportunities for high-quality sensing and actuation capabilities is basically a no-brainer to me, and I definitely see a credible market opportunity for actuation and sensing in areas like industrial automation and remote monitoring. Can management execute? That’s the major question. I think they can do better than they have been doing, but a 10% ROE could prove a very difficult bar to reach in three years’ time. The flip side is that expectations are quite low, though I do note that there is an unusually wide spread for sell-side expectations (a 12% and nearly 11% spread from high to low for revenue estimates for the next two years), which likely reflects a lot of uncertainty about the extent to which management can execute on this higher-value-add strategy (and/or the pace of that improvement). For my part, I’m looking for just over 1% growth over the next three years and long-term growth closer to 3%. I do think management can execute on this upgrade plan, but I think there will be consequences in the near term, as business exits will hit results much faster than new market entry attempts. Likewise, I think legacy businesses like camera phone actuators don’t offer a lot of long-term upsides. I likewise think that margins and free cash flow generation will improve, but I’m only looking for low-to-mid single-digit FCF margins and around 3% long-term FCF growth (annualized). These are hopefully conservative assumptions, but they still support an annualized long-term potential return above 10%. The shares look even more undervalued on margin/return-driven approaches like EV/revenue and ROE-P/BV. Both margin-driven EV/revenue and ROE-driven P/BV suggest that the shares could double (and that’s assuming no great improvement over the next few years), but I’d note that these approaches don’t work so well on the extremes (unusually high/low ROE), and Alps definitely qualifies. The Bottom Line It’s tricky to invest with a thesis of “well, it can’t get any worse” because more often than not the market shows you exactly how much worse it can get. That’s not really my thesis here – I do think management is doing some smart things to reposition the business for better long-term growth and margins – but I think it’s a relevant comment in the context of what appear to be low expectations. Is Alps Alpine a dynamic idea? Absolutely not. But the company is on the front end of what could prove to be a meaningful restructuring, and I think more aggressive investors may want to take a look; there is no need to rush, but I think expectations are at a level where management has a good chance of producing better-than-expected results over the longer term.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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