Hammered By Input And Launch Costs, Nidec Is Worth Another Look

The last year and a half has been a brutal one for Nidec (OTCPK:NJDCY) (6594.T), with the local shares down more than a third and the ADRs down closer to 50% since my last update. Nidec has been hit hard not only by a downturn in high-margin spindle motors for hard disk drives (or HDDs), but also much higher input costs and launch costs for its emerging EV auto business (e-axles). If that wasn’t bad enough, a weaker outlook for motors used in appliances and HVAC systems is also weighing on sentiment.

The investment case for Nidec used to be more of a battle about the right multiple to pay, as Nidec shares historically traded at rich multiples. While the sharp pullback has helped the longer-term valuation argument, the shares still remain pricey on more conventional short-term multiples-based approaches. While I do like Nidec’s leverage to vehicle electrification, a weaker market for consumer electronics could persist and Nidec has significant sentiment headwinds to overcome.

 

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Hammered By Input And Launch Costs, Nidec Is Worth Another Look

Nidec: Building An Electrifying Growth Story

 

The last six months or so haven’t been as kind to Nidec (OTCPK:NJDCY) (6594.T), as the shares of this leading Japanese motor company have slid about 15%, underperforming the broader industrial space. There’s always guesswork in figuring out why stocks sell off, but I think concerns about near-term weakness in autos and small precision motors, as well as a patent fight with Seagate (NASDAQ:STX), could be at least part of the problem, though the share weren’t all that cheap when I last wrote about the stock.

“Ignore the valuation and just buy” isn’t my preferred investment style, and Nidec remains quite pricey by almost any valuation approach. On the other hand, the company is still in the early days of what could be a game-changing ramp in motors for electric vehicles – not just cars, but also smaller vehicles (like electric bikes) – to say nothing of ongoing growth in the appliance and household market, as well as industrial robotics. With that in mind, this is as close as I get to a “ignore the valuation and buy” call, as I do think Nidec is a rare differentiated growth story.

 

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Nidec: Building An Electrifying Growth Story

Nidec Harnessing Electric Motors As Growth Drivers

In a world increasingly focused on energy efficiency and sustainability, Nidec (OTCPK:NJDCY) (6594.T) is built to thrive. The opportunity to provide traction motors and e-axles for electric vehicles is pretty straightforward, but opportunities like more efficient brushless motors for appliances and small precision motors for computer cooling (including data centers) may not be quite as obvious.

I’ve been bullish on Nidec for some time, and the shares are up around 200% from when I first wrote about the company for Seeking Alpha in 2017, but “only” about 10% since my last update in mid-December. The valuation here is no bargain, and I freely admit that. But for investors looking for a well-above-average growth story with legs out to at least a decade and not so concerned about valuation, this is still a name to consider.

 

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Nidec Harnessing Electric Motors As Growth Drivers

Steak Or Sizzle? Nidec Offers Both

Plenty of stocks have recovered from pandemic-driven weakness earlier this year, but Nidec (OTCPK:NJDCY) (6594.T) has done a little better than most, rising about 50% since my last update and the ADRs have outperformed the average U.S industrial by a healthy margin over the past year. I believe this renewed bullishness is being driven not only by strong near-term performance in the small motor business, but also increasing enthusiasm over the company’s long-term opportunity in motors for hybrids and electric vehicles.

I can’t really say that Nidec shares are cheap now, but I do see a strong growth story that can possibly carry the shares further. Not only does Nidec have a strong established business in small motors (and leverage to data center growth), the growth opportunity in EV motors has been getting better and better and Nidec also has some underappreciated opportunities in areas like appliance motors, robotics, and thermal management. I don’t really favor “forget valuation and focus on the story” stocks, but I do like the growth drivers here and I wouldn’t be in a rush to cash in here just yet.

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Steak Or Sizzle? Nidec Offers Both

A Lull At Nidec Looks Like An Opportunity

There’s a reason I don’t really like investing with a “valuation doesn’t matter” philosophy, and Nidec’s (OTCPK:NJDCY) (6594.TO) recent performance is an example of why. While I love the long-term potential of this leading motor manufacturer, the shares weren’t exactly conventionally cheap around the time of the October earnings report and the shares have languished since, underperforming U.S. industrial stocks by about 10%.

Although Nidec isn’t as cheap as I’d like, I think it’s still priced at a level where long-term investors can earn a market-beating return from Nidec’s efforts in electric vehicles, robotics, factory automation, and efficient appliances. Double-digit long-term revenue expectations are by no means conservative, but a strong position in EV traction motors alone can drive much of that, to say nothing of opportunities in automation and energy efficiency.

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A Lull At Nidec Looks Like An Opportunity

Nidec's Motor Story Looking Better And Better

I don't know that I'll ever bring myself to the point of saying "valuation doesn't matter", but companies and stocks like Nidec (OTCPK:NJDCY) (6594.TO) do sometimes push me in that direction. It's tough to see how Nidec is undervalued relative to reasonable expectations, but I believe investors need to at least consider the possibility that Nidec will generate "unreasonable" revenue and profit growth in the coming years on the back of a very strong technology portfolio in electric motors.

In the here and now, Nidec is struggling to meet sell-side earnings expectations, as stronger than expected order inflow and customer interest, particularly in auto traction motors and e-axles, lead the company to accelerate its product development and ramp up spending. I believe this will be money well spent, but Nidec's valuation wouldn't lead you to think it's exactly an undiscovered story, even if it's not a household name among U.S. investors.

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Nidec's Motor Story Looking Better And Better

Japan's Nidec (OTCPK:NJDCY) (6594.TO) is going through some challenges today as demand for motors and related components in markets like autos, appliances, and industrial end-markets softens, but the long-term story continues to look strong. Nidec continues to rack up wins for its EV traction motors, and Nidec looks like an appealing option for companies that want to get electric vehicles on the market sooner rather than later. Likewise, the long-term opportunity for smart DC motors in areas like appliances and industrials is quite attractive.

Valuation remains the biggest "but" to the story. The shares did pull back some after my last article on the company, but they've largely recovered, and the valuation is hard to reconcile with the admittedly above-average growth opportunity here. High single-digit prospective returns are tempting, but I'm inclined to hold out for a better prospective return before investing my own money.

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Good EV Orders Support The Long-Term Nidec Story

Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

These aren’t great times for the auto sector, with U.S. auto sales down more than 5% in April, European registrations down 4% in March, and Chinese auto sales down 11% in the first quart of 2019. Against that backdrop, it’s not really surprising that BorgWarner (BWA) is seeing revenue and margin contraction.

Looking out further, though, BorgWarner’s backlog suggests that the company’s leverage to hybrids and EVs is increasing as expected, and while there is still uncertainty as to what the margins on that business will look like, I believe today’s price discounts an excessively pessimistic view. The numbers probably won’t start looking better for BorgWarner until the second half of 2019, and there is still some risk there, but I think longer-term investors may want to dig in and do their due diligence on this underrated powertrain player.

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Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

Nidec Is A Name To Watch When Industrials Cool

Nidec (OTCPK:NJDCY) (6594.T) has participated in the global industrials rally that has also benefited names like Yaskawa (OTCPK:YASKY) and Fanuc (OTCPK:FANUY), with the same basic result – although Nidec has a bright future as it looks to transition its business to new growth opportunities in EVs, appliances, and industrial motors and controls, the recent rally has already factored in a strong rebound in the underlying business. I’m still bullish on the company, but it’s harder to argue for the stock after the 20%-plus rally since my last update and this is a name I’d flag for a pullback.

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Nidec Is A Name To Watch When Industrials Cool

A Sharp Downturn In China Seizing Up Nidec's Growth Engine

Evidence continues to mount that conditions in China, and to a lesser extent other regions around the world, are not good. Nidec (OTCPK:NJDCY) (6594.T) has seen a withering decline in auto business in the last couple of quarters, with weakness spreading beyond autos into consumer appliances and various industrial markets. At the same time, though, Nidec continues to build for its future – globalizing its production capabilities and logging significant inquiries for its electric vehicle traction motors.

Nidec isn’t quite as cheap as I might wish, and I think this macro malaise could linger on a little while longer than the Street presently expects, but I think this is a very good company now trading at a reasonable valuation. In addition to a major opportunity in EV motors, I believe Nidec is leveraged to ongoing growth in brushless motors, robotics, and data centers, and could deliver meaningful operating leverage with this latest efficiency initiative. Looking past the rocky near-term, I think these shares could be 10% undervalued today and that the shares could re-rate meaningfully higher as 2019 moves on if and when the outlook for China improves.

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A Sharp Downturn In China Seizing Up Nidec's Growth Engine

MinebeaMitsumi Looks Seriously Undervalued, But There Are Significant Upcoming Challenges

Japan’s MinebeaMitsumi (“Minebea”; also sometimes written as “Minebea Mitsumi”) (OTCPK:MNBEY) (6479.T) is certainly not a household name to most investors, but this odd mix of precision machined and electrical components is a strong leader in several attractive markets, and has uncommonly robust opportunities to drive improved operating and product synergies in the coming years. At the same time, though, the company is facing some significant product cycle risk and there are no guarantees that the synergy efforts will pan out.

Minebea looks undervalued on the basis of long-term revenue growth of just 3%, but revenue could be choppy over the next several years and the margin/FCF generation improvement I expect may prove to be beyond management’s capabilities. I’d also note that these ADRs are not very liquid at all, so investors should factor that into their evaluation process (the Tokyo-listed shares are quite liquid, for investors who wish to pursue that option).

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MinebeaMitsumi Looks Seriously Undervalued, But There Are Significant Upcoming Challenges

Investors Aren't Buying American Axle's Self-Improvement Story

There are more than a couple puzzlingly cheap (or cheap-looking) auto and truck component stocks these days. While production is certainly weakening, the market seems to be pricing in a rather drastic decline in volumes, revenue, and profit margins. To be fair, this sector doesn't have a great track record of earnings "through thick and thin", with quite a few companies sporting low single-digit long-term average FCF margins, but that also doesn't give much if any credit to the margin and liquidity structure improvements these companies made during the good times.

American Axle & Manufacturing (AXL) ("AAM") looks cheap enough that I wonder what I'm overlooking, as low-to-mid single-digit revenue growth and FCF margins averaging out in 4% to 5% range would support a fair value in the $19 to $20 range. What's more, AAM is well-placed to benefit from ongoing efficiency efforts in internal combustion engine (or ICE)-powered cars, a global preference for SUVs/CUVs, and the transition to electrification. Then again, there's a lot of debt on the balance sheet, and a lot of customer concentration risk, and projecting a significant improvement in long-term FCF margins may just be a different form of the loss-producing mantra "it's different this time".

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Investors Aren't Buying American Axle's Self-Improvement Story

EV's And Robots Offer Powerful New Growth Legs For Nidec

As the company goes from strength to strength, I continue to be impressed by the management team at Nidec (OTCPK:NJDCY) (6594.T). Not only does the company continue to gain share with its core brushless motor technology, but it also continues to expand into complementary businesses and find new opportunities to apply its core capabilities. There are still plenty of opportunities to gain share in existing businesses like appliance motors, but the more exciting opportunities are in areas like electric vehicles and robotics.

I wish Nidec was undiscovered and undervalued, but the shares do already reflect at least some of the exceptional growth potential. I suppose a mid-to-high single-digit annualized expected return isn’t terrible in today’s market, and the shares could still outperform if the company surpasses earnings expectations, but it’s tough to call this a cheap stock today.

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EV's And Robots Offer Powerful New Growth Legs For Nidec

Nidec Transforming Its Business In Meaningful Ways

Japan's Nidec (OTCPK:NJDCY) is best known as a dominant player in the market for spindle motors that power hard disk drives, but the company has done a lot to diversify its business and position itself for growth in other precision motor markets, robotics, autos, appliances, and industrial motors. What's more, it's an unusual Japanese company in that it embraces M&A, gives a lot of authority to operating units, and is shareholder-friendly insofar as targeting meaningful profit growth over size for its own sake.

Nidec shares look as though they could still offer upside from here, but the growth expectations are high. I believe the company's opportunities in autos, robotics, precision motors, and other applications can support (if not exceed) those expectations, but this is not an example of a company that has been overlooked and where the expectations are correspondingly modest. I would also note that while Nidec delisted its shares from the NYSE last year, the ADRs are relatively liquid.

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Nidec Transforming Its Business In Meaningful Ways