Omron Earnings: Negative Guidance Revision for 2023, but Semi/EV Investments to Recover in Late 2024

Although we lower our fair value estimate for wide-moat Omron 6645 to JPY 8,200 from JPY 8,900 mainly on a weaker near-term outlook for the industrial automation business, or IAB, we believe its shares are undervalued. Its share price fell significantly based on weaker-than-expected September-quarter results and a downward revision of its full-year guidance—Omron expects IAB orders to remain sluggish for the next two quarters from delays in investments related to semiconductors and electric vehicle, or EV, batteries. As a result, we lower our fiscal 2023 (ending March 2024) operating margin forecast to 5.0% from 9.0% previously, but we expect operating margin to increase to 10.3% in 2024 as these investments pick up from the second quarter. We believe that the market is overly pessimistic about the future recovery.

Omron’s September-quarter operating margin unexpectedly fell to 3.2% from 7.0% in the previous quarter, due to the margin contraction in the IAB segment, which dropped to 5.2% from 11.1% previously. Due to the weaker demand in China, especially for digital/EV battery capital expenditures, Omron was prompted to reduce capacity utilization, as the distribution channel inventories are digested, which the company expects to last at least for the next few quarters. As a result, Omron lowered its fiscal 2023 operating income guidance to JPY 45 billion, from JPY 102 billion. Although we had anticipated that the downward revision is inevitable, the magnitude of the revision was larger than expected. We, therefore, revise our operating income forecasts for fiscal 2023 and 2024 to JPY 41 billion and JPY 91 billion, from JPY 75 billion and JPY 92 billion, respectively.