Fanuc Corporation: Brighter Outlook, Eyes on China, India (OTCMKTS:FANUF)

I continue to comment Fanuc Corporation (OTCPK:FANUY) (OTCPK:FANUF) (6954:JP) as Buy. FANUY’s outlook has become brighter, and the prospects for the company’s Indian and Chinese markets are favorable. The stock is still trading below target earnings multiple, so I remain bullish on FANUY.

My attention turns to improving FANUY’s financial outlook with the latest article. I previously previewed Fanuc Corporation’s Q1 FY 2024 (YE March 31, 2025) financial performance in my June 20, 2024 write-up.

Investors should note that they may trade Fanuc Corporation shares traded on the Over The Counter market and on the Tokyo Stock Exchange. The company’s OTC shares and Japanese-listed shares boasted three-month average daily trading values ​​of $4 million and $100 million, respectively, according to S&P Capital IQ data. Trading liquidity for Fanuc Corporation is decent, but readers can also trade against the company. more liquid Japanese stocks with US brokers such as Interactive Brokers.

The financial outlook for the new fiscal year of Fanuc Corporation has become more favorable

Over the past two months, the analyst consensus peak estimate for FY2024 (April 1, 2024 – March 31, 2025) for FANUY has been raised by +2.5% to ¥804.0 billion. Fanuc Corporation’s FY 2024 operating income forecast was also revised upward by +5.2% to JPY 150.9 billion over the same time period. These consensus financial forecasts were taken from S&P Capital IQ.

Fanuc Corporation’s management raised the company’s FY 2024 revenue and operating profit guidance by +5.1% and +8.2% to JPY 784.3 billion and JPY 143.0 billion, respectively, at the end of July. The company disclosed its updated financial guidance in its Q1 FY 2024 earnings presentation slides.

Both analysts and the company have become more bullish on FANUY’s outlook after Fanuc Corporation reported superior results for the latest quarter or Q1 FY 2024. With my previous update on June 20, 2024, I indicated that I “expect Fanuc Corporation Q1 FY. 2024 revenue and operating income to beat sell-side expectations,” based on “analyst feed checks” and “recent monthly industry data.”

The company’s Q1 FY 2024 top line and actual operating income beat sell-side consensus estimates by +3.6% and +4.1%, respectively, based on S&P Capital IQ data. I previously mentioned in my June 20, 2024 article that “a potential improvement in the inventory situation at Chinese factory automation product distribution companies will bode well for FANUY’s future financial results.” In the company’s Q1 FY 2024 results announcement, published on July 29, 2024, FANUY pointed out that channel stocks are “returning to an appropriate level”.

Based on management guidance and consensus forecasts, FANUY’s projected operating profit and operating profit growth rates for fiscal 2024 are in the range of -1.4% to +1.1% and the range of +0 .8% to +6.3%. In contrast, the company’s revenue and operating income contracted by -6.7% and -25.8%, respectively, in the previous fiscal year, or FY 2023.

In the next two sections of this article, I address Fanuc Corporation’s growth prospects for the China and India markets.

China is a key driver of growth in the short and medium term

The geographic segment in China was the best performer for FANUY in the last quarter. Fanuc Corporation as a whole is likely to report good full-year results for fiscal 2024 due to the continued recovery of the Chinese market.

Fanuc Corporation’s China-generated revenue rose +11.8% QoQ in Q1 FY 2024, while the Japanese spin-off company’s sales rose +0.5% QoQ for the latest quarter. FANUY’s other geographic markets suffered from a sequential contraction of the top line for the first quarter of the current fiscal year.

On the Q1 FY 2024 analyst call, FANUY indicated that its China business “will perform well” for the full year compared to other markets. Fanuc Corporation also noted at the company’s most recent quarterly briefing that “inventory has normalized in China” and indicated that its China operations have seen “a lot of demand from the automotive industry” and “sectors related to IT”. In other words, the inventory adjustment process for the Chinese factory market is largely completed, and the short-term outlook for new orders for FANUY’s China business is favorable.

Fanuc Corporation’s Chinese operations will also benefit from positive policy developments in China. Chinese state media China Daily reported on July 26, 2024 that “China’s centrally-run state-owned enterprises will invest more than 3 trillion yuan for large-scale equipment upgrading in the next five years.” As a leading automation equipment manufacturer, with the Chinese market contributing 22.7% of the top line in Q1 FY 2024, FANUY is likely to witness strong sales growth in China as the country aims to refresh its industrial infrastructure .

India has significant long-term growth potential

Fanuc Corporation does not specifically disclose the contribution of sales from India, but the current revenue generated by the Indian market should be quite modest. In the first quarter of fiscal 2024, Asian markets excluding China accounted for 12.6% of the company’s top line, which is much lower than China’s 22.7% contribution to revenue for the same quarter.

As such, it is noteworthy that FANUY made a special mention of its India business operations in its latest quarterly analyst briefing. Fanuc Corporation stressed on its first-quarter earnings call that the company “should raise our presence in the Indian market, which will continue to grow.”

The robot penetration rate in India is very low, with around single digit robots per 10,000 workers. In comparison, China boasts a much higher robot penetration rate, with its number of robots per 10,000 workers in the hundreds.

Fanuc Corporation is the first mover in India and has gained significant market share in this geographic market. FANUY revealed at the company’s Q1 earnings briefing that its factory automation and robotics products “have a very large share” in the Indian market by virtue of the fact that it has “been doing business in India for quite a long time”. Fanuc Corporation ventured into the Indian market in 1992, as disclosed in the company’s integrated report 2023.

In short, FANUY is a leading player in a market with huge growth potential, India.

Risk factors

There are specific risks that investors should watch for regarding Fanuc Corporation.

FANUY’s business operations in China may underperform in the scenario where its customers hold back new orders due to economic uncertainty.

On the other hand, Fanuc Corporation’s India business may not realize its full growth potential, assuming the robot penetration rate in India grows at a slower pace than expected.

Conclusion

Fanuc Corporation’s outlook has improved, as evidenced by the upward revision of consensus estimates and the company’s guidance. But the stock still trades at a discount to fair valuation. With my June 20, 2024 write-up, I outlined my 31.2x target P/E multiple for Fanuc Corporation pegged at 1.2x PEG (Price-to-Earnings Growth). The stock’s current consensus P/E ratio for FY 2025 is 24.8x according to S&P Capital IQ data, implying potential upside of +26%.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.