Mitsubishi Electric Earnings: Weak Capacity Utilization of FA Systems Has an Impact on Margins

Although Mitsubishi Electric’s, or MEC’s, June quarter revenue growth of 5% year on year was largely in line with our expectations, its operating margin fell short of our previous estimate, declining 0.4 percentage points to 4.6%, mainly due to weak results of the factory automation, or FA, systems segment. Quarterly FA systems sales declined 15.5% year on year, with the segment’s operating margin down from 14.5% to 3.1%, due to deteriorating capacity utilization and a negative mix from lower sales of its profitable programmable logic controllers and servo motors. Further, quarterly orders of the FA systems segment only increased 8% year on year, suggesting lack of growth, excluding the impact of the weaker yen, as lithium-ion battery and memory-related investments remain sluggish. As a result of a weaker near-term outlook for the FA systems segment, we cut our fiscal 2024 (ending March 2025) operating income estimate by 5% to JPY 355 billion, with our operating margin assumption at 6.6%, down from 7.0%. However, our medium-term outlook remains intact, with FA systems sales and profitability to recover in fiscal 2025. Therefore, we maintain our fair value estimate at JPY 2,200, implying shares are currently fairly valued.