Keyence Earnings: Outperforming Other Factory Automation Players Amid Headwinds

Keyence’s 6861 June-quarter revenue growth of 15.8% year on year was largely in line with expectations, excluding the effects of a weak Japanese yen. With top-line growth stronger than the sales/orders of its Japanese factory automation peers, we expect the company will continue to outperform throughout 2023, while Omron and Mitsubishi Electric’s automation businesses face declining sales growth amid macroeconomic headwinds. Our expectation is based on its ability to propose machine vision-based solutions (where the company has strengths) that require less upfront investment and can immediately lead to cost savings and labor shortage issues. While we lower our 2023 revenue projection to 1.6% year-on-year growth, from 5% growth, after reflecting weaker semiconductor/electronics-related demand in Asia, we maintain our fair value estimate for Keyence at JPY 58,000. We believe its shares are fairly valued.

Our medium-term revenue projection of 12% CAGR between 2023 and 2027 remains intact. We think secular factors like an aging population/labor shortage and increased need for sensors/machine vision in factories/warehouses amid the Internet of Things trend will drive demand for Keyence’s automation products. Further, we see the company’s stance of continuing to increase its salesforce amid ongoing headwinds as reaffirming our expectations. We are pleased with the rapid pickup in global headcount, which grew 18% year on year in 2022 to above 10,000 employees for the first time, after a limited increase between 2019 and 2021. While this will have a near-term impact on the company’s operating margins—which we project to decline 2.1 percentage points year on year to 52.0% in 2023—we think this is a strong signal that the company is confident about capitalizing on further top-line growth opportunities over the medium term.