Fanuc Earnings: We Expect Further Margin Deterioration in 2023

We lower our fair value estimate for Fanuc 6954 to JPY 5,400 from JPY 5,600 after revising our operating margin assumptions. March-quarter orders suggest further near-term sales divergence in Fanuc’s two main businesses, with factory-automation orders (mainly CNC systems) down 51.4% from the previous year and robot orders up 27.5%. We expect robot orders to remain robust over the medium term, supported by secular tailwinds, such as EV production automation and increased robot adoption in general industry, while demand for CNC is subject to economic fluctuations. As a result, while our medium-term revenue growth forecasts remain largely intact, we believe the company’s product mix will be less favorable than we had anticipated, and we have lowered Fanuc’s operating margin assumption for fiscal 2026 (ending March 2027) to 23.5% from 28.0%. We believe Fanuc’s shares are currently fairly valued.

Fanuc’s March quarter operating margin declined to 20.5% from 23.9% in the previous quarter, due to the lower-than-expected FA sales. In addition, we believe that capacity utilization was even lower as the company was forced to reduce inventories, which has also weighed on Fanuc’s profitability. Based on the sluggish FA orders in the past two quarters and high inventory levels, we expect lower utilization to continue throughout fiscal 2023. As a result, we forecast FA sales to decline 15% and robot sales to increase 12% in fiscal 2023, and Fanuc’s operating margin to decline from 22.5% in the prior year to 19.5%, which is close to Fanuc’s guidance of 19.1%. We expect its operating margin to recover to 21.5% in fiscal 2024, as production of both CNCs and robomachine equipment such as robodrills picks up. In the longer-term, we expect further margin expansion driven by the recovery of CNC demand in Asia.