FA Equipment Suppliers’ Earnings: Expect Headwinds for Omron/MEC, While Keyence Outperforms in 2023

The Japanese factory automation, or FA, control equipment suppliers (Keyence, Omron, and Mitsubishi Electric 6503, or MEC) posted lower year-on-year revenue growth in the March quarter than in the December quarter. According to the Nippon Electric Control Equipment Industries Association, shipments of FA electric control equipment, including switches and relays, grew about 12% year on year in the March quarter, slowing down from 19% in the December quarter. In addition, FA-related orders for Omron and MEC declined year on year in the past two quarters, due to weak capital investments in the semiconductor/electronics industries. Therefore, our expectation of a slowdown in shipments in 2023 remains unchanged, and we maintain our fair value estimates for Omron and Keyence at JPY 9,100 and JPY 58,000, respectively. Meanwhile, we slightly increase our fair value estimate for MEC to JPY 2,000 from JPY 1,900 after revising our margin assumptions.

While the three companies compete in the industrial electronics/control and measuring equipment markets, we project Keyence to outperform amid near-term headwinds with a 5% year-on-year sales growth in 2023. Meanwhile, we forecast MEC’s factory automation systems and Omron’s industrial automation, or IAB, sales to decline by 7% for fiscal 2023, ending March 2024, despite guidance of 5.5% and 0.9% growth, respectively. We expect Keyence’s strength in offering machine vision/sensor-based solutions will benefit amid macro-headwinds, as they require less upfront investments and can immediately address labor shortage issues, especially in Japan where the company has higher exposure. However, we think these factors are already priced into the three FA equipment suppliers’ shares, which we believe are all currently fairly valued.