Company Reports

Three passive component suppliers, Murata Manufacturing, Kyocera, and TDK announced their earnings results for fiscal 2023 (ending March 2024) Friday, April 26, and each company’s operating income guidance for the new fiscal year fell short of our expectations. We believe that they made conservative assumptions for sales and capacity utilization especially in the second half of the fiscal year, as they were less confident of a full recovery in end demand. Nevertheless, TDK’s guidance may disappoint the market as it is most divergent from our expectations and the market’s. While we maintain our fair value estimates for the three companies, we have lowered our fiscal 2024 operating income forecasts for Murata and Kyocera, reflecting price erosion for automotive passive components and a slower-than-expected recovery in capital spending for industrials and general servers. We plan to revise our TDK earnings forecasts after the company announces its new midterm plan at next month’s investor day. We believe Murata Manufacturing’s shares are undervalued, while Kyocera and TDK are fairly valued.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

The earnings results of four passive component suppliers indicate that the recovery of demand for multilayer ceramic capacitors is underway as expected. In the December quarter, Murata Manufacturing’s book/bill ratio for MLCC exceeded 1 for the first time in seven quarters, while Taiyo Yuden’s BB ratio improved to 1.07 from 1.01 in the previous quarter, when it exceeded 1 for the first time in nine quarters.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

We revise our fair value estimate for Kyocera to JPY 2,050 per share, and $14.50 per U.S. ADR, following the 4-for-1 stock split and reflecting the currency movements. We believe that Kyocera’s shares are currently fairly valued.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

One of the few positive factors for the earnings of the three passive component suppliers was the solid demand for flagship smartphones such as the iPhone, and the recovery of component demand from Chinese smartphone manufacturers as they completed the inventory adjustments. On the other hand, demand for PCs and servers remained weak, and the stagnation in sales for industrials is expected to continue. As a result, the impact on each company’s business was slightly different due to their business portfolios. Murata Manufacturing, which is more exposed to the smartphone industry, has revised its operating income guidance to JPY 270 billion from JPY 220 billion, while TDK has maintained it at JPY 150 billion, and Kyocera has lowered it to JPY 120 billion from JPY 147 billion. While demand for electronic components has bottomed out and is expected to gradually improve, we are cautious that suppliers tend to offer aggressive component pricing during the recovery phase to attract more orders. We believe Murata’s shares are undervalued, while TDK’s and Kyocera’s shares are fairly valued.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

Two passive component suppliers, Murata Manufacturing and Kyocera, reported their earnings results for the June quarter. While Murata’s profit for the quarter was better than expected due to the resilient demand for flagship smartphones, Kyocera’s profit was slightly below our expectations because of the sluggish demand for semiconductors and industrial tools. Although the inventory correction for smartphones and PCs appears to be largely complete, both companies are concerned that the demand recovery for electronic components is slower than expected, and therefore we expect Kyocera’s operating income for fiscal 2023 to fall short of the company’s guidance. On the other hand, we expect Murata’s operating income to exceed its full-year guidance, as the inventory correction for MLCCs, or multilayer ceramic capacitors, has been completed earlier than for other components. After fine-tuning earnings forecasts, we maintain Murata’s fair value estimate of JPY 9,700 and Kyocera’s fair value estimate of JPY 8,200. We view Murata’s shares as undervalued, with market share gains in radio-frequency modules from 2024 to 2025 a share price catalyst.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

We lift Kyocera’s fair value estimate to JPY 8,200 per share from JPY 7,900, as we raise our revenue growth assumption due to the company’s aggressive investment strategy. Meanwhile, we lower our fair value estimate per ADR to $59 from $62 due to the weaker Japanese yen. Although we believe the financial targets in the newly announced midterm plan seem too aggressive, we are impressed by Kyocera’s aggressive investment strategy in growth areas. In the past, Kyocera often invested at the peak of the cycle and suffered from overcapacity when demand cooled. However, in this midterm plan, investment plans are determined based on a long-term outlook amid the weak demand, giving the impression that management decisions are being made more quickly than before. Kyocera’s share price has risen 23% since the beginning of the year, and we believe shares are currently fairly valued.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

Based on the disappointing December-quarter results and the downward revision of full-year guidance, we revise our fair value estimate for Kyocera to JPY 7,900 from JPY 8,400. Weak smartphone shipments were initially seen in low-to midrange models, but the impact has now spread to flagship models, which have been relatively resilient. As a result, inventory adjustment in semiconductor packaging started later than in other devices, such as semiconductor memory and passive components, and is expected to continue through the second half of this year. In addition, an unexpectedly sharp decline in sales of Kyocera’s smartphones prompted the company to restructure its handsets business. Mainly for these reasons, we lower Kyocera’s fiscal 2022 (ending March 2023) and 2023 (ending March 2024) operating income forecasts to JPY 120 billion and JPY 155 billion, from JPY 175 billion and JPY 195 billion, respectively. Meanwhile, Kyocera’s fair value estimate per U.S. ADR rises to USD 61 from USD 58 due to the weakening U.S. dollar. We believe Kyocera’s shares are undervalued, but they lack near-term catalysts.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

Kyocera’s September quarter operating income of JPY 35 billion was 15.2% down sequentially and below our expectation. The core components business was the least affected by the ongoing headwinds and broadly in line with our expectations, due to robust demand from the auto and semiconductor industries. The electronic components business, which is also less exposed to the Chinese smartphone market, had steady revenue growth. On the other hand, the solution business was below our forecasts due to much weaker shipments of its smartphone solutions, and increasing materials costs damaged the profitability of its copiers. In addition, a one-time litigation cost of JPY 7 billion impaired the company’s profitability. Based on the weaker-than-expected results and economic outlook, we cut Kyocera’s fair value estimate to JPY 8,400 per share and USD 58 per U.S. ADR, from JPY 8,800 per share and USD 65 per U.S. ADR, respectively. We continue to believe Kyocera’s shares are undervalued as its diversified business portfolio should deliver solid profitability.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

While other tech companies will probably suffer for the next few quarters as a result of weaker shipments of smartphones and PCs, we forecast Kyocera’s earnings to remain relatively resilient, thanks to its diversified product portfolio and smaller exposure to the Chinese smartphone market. As a result, Kyocera's components business can fully benefit from the weaker yen. We've raised our operating income forecast to JPY 185 billion from JPY 173 billion for fiscal 2022 and to JPY 210 billion from JPY 190 billion for fiscal 2023, as we revised our midterm foreign-exchange assumptions to JPY 128 from JPY 112 per $1 and to JPY 135 from JPY 130 per EUR 1. We lift our fair value estimate to JPY 8,800 per share from JPY 7,700. Meanwhile, due to the weaker yen, our U.S. ADR fair value estimate declines to $65 from $68. We retain our view that demand for auto digitalization and semiconductors will deliver solid growth for Kyocera, and we believe the shares are undervalued.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

We have updated our earnings forecasts for four passive components suppliers--Murata Manufacturing, Taiyo Yuden, TDK, and Kyocera--and retain our view that supply-demand for multi-layer ceramic capacitors, or MLCCs, will remain tight throughout 2022, due to robust auto demand. Despite the weak orders in the December quarter because of the inventory correction for Chinese smartphones, MLCC pricing remained quite solid. In addition, MLCC suppliers decided to maintain a relatively high utilization rate to build up enough inventory to prepare for high auto demand. As the production of high-capacity, high-voltage MLCCs used for auto places a heavy load on capacity, robust auto demand underpinned by the content growth will contribute to tightening the supply-demand, which we believe is underestimated by the market. We retain our view that orders from Chinese smartphones will bottom out in the March quarter although the recovery may be somewhat weaker than expected, and auto production will recover quarter by quarter along with easing of the chip shortage. Hence, we expect that MLCC orders will continue to improve toward the end of this year and believe the recent dip in share price is offering good opportunities to accumulate.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.