Fanuc Earnings: Robot Inventory Correction Comes to an End, Orders to Lift in the Second Half

While Fanuc Robot orders were down 6% year over year in the September quarter, indicating that the recovery in robotics is slower than we had anticipated, this is largely offset by solid FA orders and a strong recovery in Robomachine orders, which were up 15% and 56%, respectively. In addition, the operating margin improved 4.9 percentage points to 22.1% year on year, which we believe reflects an improved product mix and utilization. Combined with lower inventory levels, we believe the September quarter numbers support our view that the ongoing inventory correction is nearing an end. We believe Fanuc's shares are undervalued as the market is too pessimistic about the midterm outlook for its robot business. We lower our fiscal 2024 growth forecast for the robot segment to negative 14% from negative 9%, reflecting near-term weakness on demand, but we maintain a CAGR of 8% between 2024 and 2028, as we see there are still plenty of spaces for robot products to grow in key markets such as China. On the other hand, we raise our operating margin to 20% from 18.7% for fiscal-year 2024 in reflection of continuously improving product mix. As the recovery is in line with our expectations, and the shortfall in robot sales will be offset by the highly profitable FA and Robomachine businesses, we maintain our fair value estimate for Fanuc at JPY 5,200.