The Worst Should Be Over For Yaskawa

seekingalpha08-21

Yaskawa has seen a choppy downturn, with inconsistent results across revenue, earnings, and orders, but orders for factory automation and robotics appear to be in an early recovery stage.Yaskawa's FQ1...

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Both businesses saw double-digit sequential growth in orders.It can be challenging to build a compelling valuation-based argument for Yaskawa, but this could be a better thematic call on a factory automation capex recovery in 2025.SweetBunFactory Japanese automation specialist YASKAWA Electric Corporation (OTCPK:YASKY) (OTCPK:YASKF) (6506.T) has had a bit of a strange downturn, with choppy quarter-to-quarter results across revenue, earnings, and orders, but with orders showing some sequential strength, it seems reasonable to start thinking about what the recovery path for this large player in motion control and robotics will look like. Yaskawa shares are down about 10% since my last update, underperforming Fanuc Corporation (OTCPK:FANUY), as well as other automation players like ABB Ltd (OTCPK:ABBNY) and Nabtesco Corporation (OTCPK:NCTKY). Though I do see some risks that recoveries in important markets like renewable energy and semiconductors could yet prove choppy, and I do have concerns about capex spending in markets like autos and oil/gas, I think inventories are relatively low across most end-markets and I believe Yaskawa's products address real and ongoing issues with labor availability and cost and remain important enabling technologies for growth. Valuation is mixed, due in part to the fact that Yaskawa has never been as good as some of its non-Japanese peers at converting revenue and profits into cash flow, but I think there's a case to be made that the shares could be 10% or more undervalued today. Looking Back At Fiscal Q1 Results Yaskawa's reporting schedule generally has the company being among the first major industrial companies to report, and on balance I would say that the company's results were not only weaker than expected, they were weaker than many Western peers. Revenue declined 7% as reported, or about 14% in constant currency terms, which was notably weaker than the slight growth at ABB, the 3% revenue decline at Fanuc, and the 4% decline at Schneider Electric S.E.'s (OTCPK:SBGSY) automation business, though Siemens Aktiengesellschaft (OTCPK:SIEGY) did far worse (down more than 25%) in its non-software automation business (admittedly this is cherry-picking to some extent, but as Yaskawa doesn't have a meaningful software business, I think it's reasonable). Motion Control revenue was down 17%, with servomotor sales down 26% and inverter sales down about 2%. By comparison, ABB's Motion segment saw a 1% revenue decline, with Yaskawa seeing a significant downturn in solar-related business and a more sluggish recovery in semiconductor markets (both impacting servos), but healthy demand from oil/gas customers for inverters. In Robotics, Yaskawa reported 8% yoy growth, outperforming the 8% decline at ABB (though this isn't a great like-for-like comparison either) and the 4% decline at Fanuc. Despite a lot of press about how auto OEMs outside of China are pulling back from capex investments for EVs, Yaskawa saw healthy demand from Tier 1 auto customers in Europe for EV projects. Gross margin weakened 50bp to 35.2%, and operating income fell 32%, missing sell-side expectations by 27% (not to mention missing company projections). Operating margin fell about three points to 8.4%, easily the worst result in years. Both Motion Control and Robotics saw meaningful profit erosion, with MC earnings down 43% (margin down more than four points to 8.4%) and Robotics earnings down 23% (margin down more than three points to 8.4%). Orders Suggest A Bottoming, But The Recovery Could Be Lumpy Management has remained fairly upbeat about the prospect of a recovery later in the fiscal year (the end of calendar 2024 and the start of calendar 2025), and while that's encouraging, it's worth noting that Yaskawa management's track record with guidance is not exactly one of conservatism. Still, orders do give some reason for optimism. While orders were down 1.5% year over year, they were up about 23% sequentially. Moreover, looking at the automation parts of the business (excluding Systems Engineering), orders were up 4% yoy and 29% QoQ, with MC orders down 2% yoy and up 18% QoQ and Robotics orders up 12% and 30%, respectively. It does seem as though there's some divergence here between Japanese and Western automation providers. Basically, every large Japanese automation vendor saw sequential growth (Fanuc up 14%, Mitsubishi Electric up 7%, Nabtesco up 9%, and Omron up 6%), while ABB saw a 4% decline in its automation orders and other Western providers have noted still-sluggish trends in orders. On the positive side, I do think Yaskawa can expect to see semiconductor demand continue to improve in the coming quarters, and that has long been a significant market for the company. The company also enjoys a strong presence among Chinese EV companies and activity there has stayed relatively healthy; management has also made bullish commentary about expecting strength in Western auto OEM orders to be sustainable, but I'm more skeptical. HVAC markets remain healthy, and I expect Yaskawa to see a recovery in renewable energy demand in the coming quarters. I would also expect machine tool demand to pick up from recent lows, but not unlike the semiconductor recovery, that one could prove to be lumpy and protracted given how companies in a wide range of industrial markets have pulled back significantly on new capex investments in the last couple of quarters and don't seem likely to resume spending until after the U.S. elections. Now for the \"buts\". I do think that oil/gas demand could slow some; while automation adoption continues to grow among E&P companies, overall energy capex spending has been slowing. I'm also cautious on the outlook for China in general - China accounts for more than 20% of Yaskawa's revenue base and there are still legitimate concerns about the economy there and what that will mean for capex spending over the next 12 months. The Outlook One of my biggest long-term concerns about Yaskawa is whether the company can generate better margins and cash flow from its revenue base. While Yaskawa's FCF generation is fairly normal relative to its peers in Japan, it underperforms Western comps like ABB and Rockwell Automation, Inc. (ROK). I am also interested to see how Yaskawa navigates emerging challenges in the important China market. While I'm bullish on global demand for automation adoption (as a means of managing labor scarcity and/or costs in many regions), Yaskawa has seen many local Chinese companies step up in the Motion Control space over the last five years. These companies have generally been most competitive in the lower end of the market, but management's efforts to shift more of its Chinese business away from discrete product sales and towards total solutions provision and/or customized solutions carries execution risk. I do expect to see financial results improve as this fiscal year goes on, and I'm looking for fiscal year revenue to be basically flat with the prior year. The biggest risks to that outlook are largely macro - particularly whether the economies in China, the U.S., and the EU weaken further and pressure capex spending. Longer-term, I still expect Yaskawa to generate around 5% annualized revenue growth. On the margin side, I have to give some credit to management - while revenue has been coming up short of late, the company is keeping EBITDA margins in the mid-teens, and I think improvement toward 17% over the next five years is possible. While there could be more operating leverage and stronger incremental margins as Yaskawa's business recovers, I think management would likely reinvest any incremental benefits back into the business (it's what they've done in the past). In terms of free cash flow, I'm expecting steady improvement from the mid-single-digits toward the double-digits, and this may well be where I'm too bullish, as I'm expecting a pretty significant improvement over Yaskawa's historical FCF conversion. In addition to better margins, I'm expecting the company's capex and working capital needs to decline (relative to sales), and that should allow for better FCF generation and long-term adjusted growth of around 6%. Discounted cash flow rarely works well with Japanese companies, as the market typically uses much lower discount rates than I'm comfortable with. Still, the shares don't look that expensive on discounted FCF, and that's encouraging. I do find that multiple-based approaches work somewhat better, and based on the company's margins and returns (ROE, ROIC, et al.), I believe a 3.4x multiple to book value is reasonable, suggesting close to 15% upside. The Bottom Line Yaskawa may be less interesting to me as a fundamentals-driven call, particularly as it is tough to make the valuation work on DCF or EV/EBITDA, but I do think the business is bottoming out, and I think there's a potential here to leverage a recovery in automation capex later this year in markets outside the U.S. and Europe and in 2025 for those markets. With that, I think these shares have some appeal now for risk-tolerant investors who are less sensitive to valuation and want to play a thematic/cyclical call on improving industrial capex into and through 2025.  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.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461837684"}