Company Reports

As expected, Omron’s industrial automation business, or IAB, continues to face headwinds, leading to a 10% year on year companywide revenue decline in the June quarter, due to sluggish factory automation demand in key markets like China. However, its operating margin of 3.4%, down from 7.0% in the previous year, was slightly better than expected due to progress in IAB’s restructuring initiatives. As we expect further cost cuts, we slightly raise our operating margin assumption for fiscal 2024 (ending March 2025) to 6.4% from 6.1%, but our longer-term outlook remains largely unchanged; therefore, we maintain our fair value estimate at JPY 7,500. We believe the market underestimates the company’s operating margin recovery from fiscal 2025, which we project to increase to 9.1%, driven by improved capacity utilization and IAB's sales growth for electronics/semiconductor and electric vehicle-related applications, which have high profitability.

Omron’s March-quarter results and full-year guidance for fiscal 2024 (ends March 2025) show signs of a recovery in the operating margin of its industrial automation business, or IAB. However, due to slower channel inventory adjustments, we cut our fiscal 2024 operating income forecast to JPY 52 billion from JPY 68 billion, assuming a 4% revenue growth and 6.1% operating margin. As such, we lower our fair value estimate to JPY 7,500 per share from JPY 8,000. Nevertheless, we believe Omron’s shares are undervalued as the market underestimates IAB’s medium-term margin expansion, driven by improved capacity utilization and a favorable product mix from increased automation solutions to the electronics/semiconductor and automotive industries.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, but we expect its profit drivers to be its industrial automation and healthcare businesses. The firm is one of the leading domestic players in the factory automation, or FA, control equipment market (which include programmable logic controllers, or PLCs, relays, sensors, and switches). As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population in developed markets, increasing labor costs, and production safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions increased its product line, allowing the firm to provide tailored automation solutions to customers.

Based on worse-than-expected results for the industrial automation business, we lowered our fair value estimate of Omron to JPY 8,000 from JPY 8,200 after revising our near-term operating income forecast. December quarter IAB operating margin declined sequentially to 1.0% from 5.2%, with sales down 8% in the same period due to a negative mix from lower sales to the electronics and electric vehicle industries and deteriorating capacity utilization. With profits to be affected by delays in electronics/EV investments, we cut our operating income estimate for fiscal 2024 (ending March 2025) to JPY 68 billion, down from JPY 91 billion. However, our medium-term outlook remains intact, and we believe Omron’s shares are undervalued. Considering the recent share price decline, we think the market is overconcerned about IAB’s profit recovery from 2025.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm is one of the leading domestic players in the factory automation, or FA, control equipment market (which include programmable logic controllers, relays, sensors, and switches). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

Although we lower our fair value estimate for wide-moat Omron 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 uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm is one of the leading domestic players in the factory automation, or FA, control equipment market (which include programmable logic controllers, relays, sensors, and switches). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm is one of the leading domestic players in the factory automation, or FA, control equipment market (which include programmable logic controllers, relays, sensors, and switches). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm is one of the leading domestic players in the factory automation, or FA, control equipment market (which include programmable logic controllers, relays, sensors, and switches). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

We lower Omron’s fair value estimate to JPY 8,900 from JPY 9,100, based on a weaker near-term outlook for the company’s industrial automation business, which makes up above half of companywide revenue. While IAB’s June-quarter sales growth of 9.5% year on year was in line with expectations (excluding exchange rate effects), we have a softer outlook for semiconductor investments and IA demand in China. The company confirmed that digital-related demand has been recovering at a slower pace than previously expected, with orders remaining sequentially flat, and we expect orders to remain stagnant until the March quarter next year. We lower our fiscal 2023 IAB sales growth assumption to a 12.5% decline, down from 7% decline previously. While the market reaction from the earnings announcement was negative, we think the market is underestimating IAB’s outlook from 2024 onward. We, therefore, believe Omron's shares are undervalued and a pick-up in digital/semiconductor-related investments toward the end of the fiscal year will serve as a catalyst for its shares.

The Japanese factory automation, or FA, control equipment suppliers (Keyence, Omron, and Mitsubishi Electric, 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.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm is one of the leading domestic players in the factory automation, or FA, control equipment market (which include programmable logic controllers, relays, sensors, and switches). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

We lower Omron’s fair value estimate to JPY 9,100 from JPY 9,300, after nudging our fiscal 2023 (ending March 2024) net profit forecast down on a weaker industrial automation business segment growth outlook. While fiscal third-quarter performance is in line with expectations, and IAB segment revenue growth remains strong rising 23.9% year on year, order book growth is easing, implying a softer outlook ahead. We think Omron’s share price already reflects the weaker outlook, and shares are attractive for investors willing to hold through the cycle. However, we note that Omron’s share price may lag companies showing growth in fiscal 2023. We currently prefer industrial robotic maker Fanuc, whose order books are buffeted by electric vehicle investments and increasing robotic applications in less-penetrated customer industries.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm boasts the leading domestic share in the control-related factory automation, or FA, equipment market (40% including programmable logic controllers, or PLCs, relays, sensors, switches, and other control equipment). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

While Omron’s fiscal second-quarter results were largely in line, we lowered Omron’s fair value estimate to JPY 9,300 from JPY 9,900, after reducing our estimates for its fiscal 2023 (year ending March 2024) revenue and operating margin. Although currency tailwinds and demand from the electric vehicle industry are helping orders for its industrial automation business, or IAB, in the near term, the slowing growth of new orders points to a normalizing backlog and weakening sales outlook. Weakening global consumer confidence may also have an impact on sales of consumer healthcare products and components. As such, we see revenue sliding 4% year on year in fiscal 2023 from growth of 13.6% in fiscal 2022 before normalizing to our assumed midcycle average of 5.5%, barring any drastic rebound in the yen against other currencies. We think Omron’s share price already reflects the softer 18 months outlook but there are likely to be limited catalysts that would spark relative outperformance in the near term.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm boasts the leading domestic share in the control-related factory automation, or FA, equipment market (40% including programmable logic controllers, or PLCs, relays, sensors, switches, and other control equipment). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm boasts the leading domestic share in the control-related factory automation, or FA, equipment market (40% including programmable logic controllers, or PLCs, relays, sensors, switches, and other control equipment). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

Omron’s fiscal 2022 June quarter results showed the impact from the lockdown in China was worse than expected, as industrial automation, or IA, sales and capacity utilization in the region deteriorated. Despite this, we maintain our fair value estimate at JPY 9,900 after considering swift recovery in June production/sales and IA orders being at record levels. Shares continue to be undervalued, as prices have been stagnant from concerns over a potential slowdown in demand across Omron’s businesses from a recession as well as margin impact from rising components costs. While there are near-term concerns over reduced capital spending plans by select chipmakers, IA orders in the digital field (especially on the logic-side) remain strong. Further, over the medium term, we expect factors, like longer-term capacity expansion of advanced semiconductors and ongoing labor shortage, will drive automation demand in the digital, EV/battery, food, and healthcare areas and we therefore see upside potential.

Omron uses its sensing and control-related technologies to cover a broad spectrum of fields, and its core focus will be in industrial automation and healthcare. The firm boasts the leading domestic share in the control-related factory automation, or FA, equipment market (40% including programmable logic controllers, or PLCs, relays, sensors, switches, and other control equipment). It also has the leading global share with its home-use blood pressure monitors, BPMs, at a 50% share. As the main driver, we expect the industrial automation segment is well-positioned for secular growth, driven by an aging population, increasing labor costs in key Asian markets, and the coronavirus exposing manufacturers to risks related to supply chain contingency/continuity and safety. As trends related to the "Internet of Things" gain prominence, automation equipment such as PLCs will be required to connect to networks/databases in factories. Also, Omron’s recent acquisitions allowed it to expand its product line, as the firm continues to focus on providing automation solutions to customers, based on its products.

Omron’s fiscal 2021 revenue, ending March, was in line with our expectations, up16.4% year on year, supported by strong factory automation, or FA, demand. We retain our JPY 9,900 fair value estimate after fine-tuning our projections based on the latest earnings and midterm plan. Shares are undervalued, as prices have declined year to date, likely from concerns over rising components/logistics costs and decline in order/sales growth momentum from lockdowns in China; as well as reduced stay-at-home demand affecting the sales of thermometers, relays for consumer electronics, and so forth. While we expect these headwinds will hurt near-term sales, we think much of this downside is priced in and believe the company’s industrial automation business, or IAB, which makes up close to 60% of sales, is well-positioned for FA investments related to electric vehicles, digital (5G and semiconductor-related), and food/packaging.