Fanuc Earnings: Weak Orders Suggest Slow Recovery but Downside Risks Are Priced In

Factory automation, or FA, segment orders (mainly computer numerical controls, or CNCs, for machine tools) in the December quarter were down 17% sequentially, but this isn't as bad as it appears, due to the front-loading of domestic orders in the September quarter. We estimate FA orders were essentially flat, suggesting CNC demand is not deteriorating. Robot orders rose 6% sequentially, lower than we expected, but gradually bottoming out. While we trim our near-term revenue assumptions based on a slower recovery in first-half fiscal 2024 (ending March 2025), we retain our Fanuc fair value estimate at JPY 5,200, as our longer-term outlook remains unchanged. We revise our fair value estimate for its U.S. ADR to USD 18.05 from USD 20.00, after adjusting our USD/JPY assumption to JPY 144 from JPY 130. We think much of the downside risks are priced in its shares and see upside potential over the medium term. The market leader’s industrial robots will be necessary to deal with rising labor costs as well as further electric vehicle, or EV, investments in the U.S./Europe. With the market underestimating these factors, we believe Fanuc’s shares are undervalued.