Keyence Earnings: Fair Value Cut of 4% Reflects Slowdown in Hiring After Two Years of Fast Expansion

Narrow-moat Keyence reported that fiscal 2024 companywide sales and operating profit grew by 9.5% and 11.1% year on year, respectively, which aligns with our previous estimate, indicating remarkable resilience amid macro turmoil. Markets other than Europe reported strong growth in the December 2024 quarter, with quarterly sales from Japan, the Americas, and Asia growing year on year by 8.5%, 12.6%, and 17.7%, respectively. Management commented that China has returned to growth, with growth at around the same level as the Asia market. On the other hand, quarterly sales from Europe dropped by 6.5% yearly, or 5.5% sequentially, suggesting the demand recovery is likely to happen later than expected. As a result, we cut our sales estimates for Europe in fiscal 2025 to JPY 154 billion from JPY 188 billion. Given the recent slowdown in new hires, we also trimmed our fiscal 2025 sales estimate for Japan. Employee count decreased by 25 to 12,261 by the end of fiscal 2024, after the drastic increase of 1,619 and 1,706 in fiscal 2022 and 2023, respectively. Keyence has shifted its focus to on-the-job training for employees hired in the past two years and has slowed down its hiring pace, especially in Japan. Consequently, sales growth will mostly depend on growth in sales per employee rather than growth in employee numbers. We lowered Japan's fiscal 2025 sales assumption to JPY 402 billion from JPY 423 billion as previously estimated, representing 8% year-on-year growth, consisting of headcount growth of 2% and sales-per-capita growth of 6%. While we slightly raised our sales estimate for Asia to JPY 318 billion from JPY 316 billion, this cannot fully absorb our downward revision in Europe and Japan. Overall, we cut our companywide sales estimate by 4% to JPY 1.156 trillion for fiscal 2025, and we trimmed our fair value estimate for Keyence by 4% to JPY 61,400; the shares are fairly valued.