Murata Manufacturing Just Announced That its Smartphone Segment will Suffer Greatly due to China
Earlier this week, I published a stock-analysis on Murata Manufacturing:
However, recent announcement from Murata’s leadership has changed its projections:
According to Bloomberg news [2022/10/20]: “Murata Manufacturing Co. expects this year’s drop in smartphone sales to keep going well into 2023, led by a sharp downturn in China.
The company’s outlook has dimmed dramatically from a quarter ago, when it looked forward to a bounceback in Chinese demand after the end of Covid-19 lockdowns in major cities. Consumers in the world’s biggest smartphone market haven’t responded with a spending spree and Murata sees little prospect for a rally over the next year.
What does this mean for Murata Manufacturing’s stock?
Smartphone related manufacturing account for more than 40% of Murata’s revenue, so it’s definitely a big deal. However, according to Murata’s CEO, Norio Nakajima: “The weak yen gives us a breather as it will make our earnings look good”. The weakened yen, which now approaches 150 yen to a US dollar, is really helping prop up the company’s bottom line as 65% of its production is done in Japan but more than 90% of sales are made overseas.
So even though demand is dropping, Murata Manufacturing is incredibly well positioned to take advantage of the weakening yen, so short-term profits will likely remain high.
Previously, Murata guided its revenue would increase by 11 billion yen ($74 million) per year due to the yen weakening against the US dollar. However, this is dangerous, because the impact from foreign exchange rates masks falling factory operating rates stemming from weakening demand.
Also, rising energy costs due to the Russia-Ukraine war will weigh on profits over the long term because increasing prices is unfeasible for some competitive products, including Murata’s main offering of ceramic capacitors, one of the main components in Apple’s iPhone.
However, outside the consumer realm, Murata is enjoying robust demand from clients erecting 5G wireless base stations, following big investments in building out network capacity across Asia. The auto industry, riding a boom in electric vehicle development, is another bright spot.
Has my view of Murata Manufacturing’s stock changed?
Short answer, no. I still believe this is a stock to hold.
It has already fallen 26% YTD, which for a company with higher revenue growth and operating margins than its peers is definitely enough to account for the falling demand in smartphones.
Also, as the yen is so weak, it will boost Murata’s profits short-term, which will likely calm the shareholders. I believe this news will impact the stock negatively in the coming weeks, but this means an opportunity to buy might be sooner rather than later.
Also, as Murata’s B2B segments are still growing rapidly, revenue streams will likely shift rather than getting wiped out.
If Murata Manufacturing’s stock reaches JPY 5,000, its P/E would be 10x on its FY2021 profits, a margin of safety large enough for me to buy. However, at its current price of JPY 6,900, I would still hold off.