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.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

The earnings results of four passive component suppliers indicate that the recovery of demand for multilayer ceramic capacitors, or MLCCs, is underway as expected. In the December quarter, Murata Manufacturing’s book/bill ratio for MLCCs exceeded 1 for the first time in seven quarters, while Taiyo Yuden’s book/bill ratio improved to 1.07 from 1.01 in the previous quarter, when it exceeded 1 for the first time in nine quarters. While demand for PCs, servers, and industrials remains weak, demand for smartphones and automobiles—where inventory adjustment is largely complete—drove the order growth. We are particularly relieved to hear from companies that inventory adjustment for automotive MLCCs does not seem to last, which we had feared. Although electric vehicle demand is uncertain in China, strong demand for hybrid vehicles is expected to drive content growth per car, supporting solid MLCC demand. In addition, demand for PCs and servers is likely to pick up soon, followed by a recovery in industrial demand in late 2024. With suppliers’ inventories already at appropriate levels, we expect margin expansion to continue in the following quarters as the utilization rate increases. We revise our earnings forecasts and fair value estimates for four passive component suppliers, and believe that Murata and Taiyo Yuden’s shares are undervalued, while TDK and Kyocera’s are fairly valued.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

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.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

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 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 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.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

Although Murata Manufacturing and TDK, two major suppliers of multilayer ceramic capacitors, gave mixed guidance for the new fiscal year, we maintain our view that strong demand for auto MLCCs will continue, while orders for smartphones will gradually recover in the coming quarters. Although the timing of a full recovery in demand for smartphones and PCs remains difficult to predict, we believe that the inventory digestion for smartphones has made significant progress in recent quarters, and therefore MLCC orders will gradually approach previous levels. We will revise our earnings forecasts and fair value estimates after discussions with both companies in mid-May, but continue to believe that shares of both are undervalued, as MLCCs' midterm growth driven by auto demand is not fully priced in.

We lower our fair value estimates for Murata Manufacturing and Taiyo Yuden to JPY 9,700 and JPY 6,000, from JPY 10,000 and JPY 6,500, respectively, as their profitability recovery will be slower than previously anticipated due to prolonged inventory correction. In addition to the further reduction in procurement of components used for Android devices and PCs, iPhone production during the holiday season was lower than expected due to factory shutdowns caused by the pandemic; and capital spending on base stations and data centers is stagnating due to the economic slowdown. Because of this weaker demand, we expect multilayer ceramic capacitor, or MLCC, suppliers to further reduce their utilization rates in the first half of 2023, as their inventory levels have not been reduced as expected. As a result, we lower Murata’s fiscal 2023 (ending March 2024) revenue by 7% and operating margin assumption to 19.7% from 21.8%, and Taiyo Yuden’s fiscal 2023 revenue by 8% and operating margin assumption to 13.3% from 16.8%, which is the reason for lowering their fair value estimates. Meanwhile, we remain optimistic about the long-term growth opportunity for MLCCs, driven by increasing data traffic and auto digitalization. We expect the March quarter to be the bottom of the utilization rate, which should improve toward the end of 2023.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

Although Murata Manufacturing and Taiyo Yuden have cut their full-year operating income guidance, we are encouraged that major multilayer ceramic capacitor, or MLCC, suppliers are lowering their utilization rate to digest inventories in the supply chain. As a result, we believe the end of the September quarter will be the peak of the inventory level, which is a positive sign, suggesting that we are at the bottom of the cycle. We note that the MLCC price erosion has been much smaller than in the past downturns as demand for premium MLCCs—which are used for autos, servers, and base stations—has been quite solid, supporting the blended average selling price to remain stable. Also, unlike in the past, Taiwanese suppliers including Yageo have not been implementing an aggressive pricing strategy so that they can protect their profitability. Therefore, we think that MLCC suppliers will maintain a relatively healthy margin and we remain confident about the long-term growth opportunities in 5G communication, increasing data traffic, and auto digitalization. We believe the market is overlooking these structural changes in the MLCC industry. Murata’s fair value estimate is revised to JPY 10,000 from JPY 10,800, and Taiyo Yuden’s fair value estimate is revised to JPY 6,500 from JPY 7,500 incorporating the impact of the lower utilization rate, but we continue to believe both shares are undervalued.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

As a result of the weaker shipment outlook for Chinese smartphones and PCs, our fair value estimate for Murata Manufacturing is revised to JPY 10,800 from JPY 11,300, and our fair value estimate for Taiyo Yuden is revised to JPY 7,500 from JPY 8,500. Like other passive components suppliers, Murata and Taiyo Yuden have been prompted to cut utilization rates so as to digest excess inventories. We expect the inventory correction to continue for at least the next two quarters, which will be much longer than we had previously anticipated. This would materially drag down the profitability from our original forecasts, and as a result, our operating income assumptions for the two companies, which assume JPY 128 per U.S. dollar, will fall short of both companies’ guidance for this fiscal year. Nevertheless, we believe that the negative impact of the inventory correction is mostly priced in and that shares of both companies are undervalued. We also retain our long-term view that MLCC suppliers will benefit from the content growth driven by auto digitalization and 5G rollout.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

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.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

We raise Murata Manufacturing’s fair value estimate to JPY 11,300 from JPY 10,200, following its robust September-quarter results. Although the firm did not update its full-year guidance due to uncertainty in the supply chain, we forecast Murata’s operating income for fiscal 2021 (financial year ending March 2022) will be JPY 385 billion, up 22% from the previous year and should exceed Murata’s original guidance of JPY 365 billion. Murata’s first-half numbers were better than our expectations, and we believe second-half numbers will not be bad as the market expects. In the longer term, we retain our view that multilayer ceramic capacitors, or MLCCs', product mix will continue to improve driven by demand for high-end products for autos and smartphones. In addition, we expect Murata’s RF module business to gain market share as performance requirements for 5G become more stringent. Our new fair value estimate of JPY 11,300 corresponds to 22.6 times 2022 price/earnings, and we believe Murata’s shares are currently undervalued.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.