Omron Earnings: Expect Margin Improvement to Continue in Fiscal 2025 as Demand Recovers

We maintain our fair value estimate of JPY 7,400 for wide-moat Omron as our midterm outlook for the company’s margin expansion remains intact. While revenue dropped by 1% year on year in the December quarter, operating profit margin improved to 8.1%, an improvement for four consecutive quarters after bottoming out at 2.9% in the same period last year. We attribute the strong recovery in profitability to enhanced structural reforms, including reducing staff and product/region mix optimization and we see the margin improvement continuing as demand gradually recovers and the utilization rate continues to rise. We see the companywide operating profit margin improving further to 9% in fiscal 2025 from 7% in fiscal 2024 and eventually increasing to 11.7% in fiscal 2028 as Omron achieves better inventory management and better mix shift to high value-added products in the future. We think the company’s shares are substantially undervalued as the market is skeptical of the company’s ambitious plan of achieving historical JPY 90 billion operating profits by fiscal 2026. However, we have a higher conviction on Omron’s guidance given the significant efficiency improvements in the past several quarters.