Thesis: We believe that a great migration from HDDs to flash-based / SSD-based devices has begun. This makes Nidec a great secular short as it is the last member of the HDD food chain to retain a growth valuation (best case ~5% normalized FCF yield). A near term catalyst could be Oct-end earnings, where management will likely have to revise its aggressive 4Q unit guidance lower (based on very negative recent datapoints in the PC & HDD supply chain). Strong cannibalization of HDD-based notebook demand by the iPad and other tablets, which to date, all use Flash-based memories (NAND) and not HDDs, will result in lower PC volumes and greater price competition in notebooks / HDDs. This should eventually create volume headwinds and more than usual pricing pressure for component suppliers. As a result, Nidec will miss out year consensus numbers and/or see multiple compression, as it trades at a very large premium to the public HDD manufacturers (STX and WDC). We have passed the critical point of flash being cost competitive with HDDs on 64G - 128G consumer notebooks, and Nidec has admits that as much as 50% of the end markets for its motors are in consumer devices. The power consumption, speed, and stability benefits of SSD are allowing it to being to cannibalized the enterprise HDD sector as well.
Description: ~65% of Nidec's EBIT comes from selling HDD motors and other PC components (cooling fans, etc.). This is the company's highest margin business (~18% EBIT margin vs overall Co. at 13 % margin), and it is dominated by "brushless" (electronic) / spindle motors that go into standard 2.5" (notebook) and 3.5" (desktop) HDDs. This motor technology has not significantly changed since the 80s. Nidec's HDD market share was ~60% in 2004 and has gradually increased (to close to 80%) through the downturn w/ industry capacity reductions. There is not an outsized #2 competitor, but Minebea and Alphana Technology have competing HDD motors. As a % of HDD motor sales, Nidec's sales split mirrors the HDD industry: STX is 31%, WDC is 30%, Hitachi is 21%, and Samsung and Toshiba are the other two significant customers. The majority of Nidec's HDD motor sales are conducted just-in-time, with quarterly pricing. Even though Nidec has 80% market share in HDD motors, it is continuing to cut prices 1-2% q/q every quarter, in order to "stay on the good side of the HDD co's" (Nidec's HDD motor ASPs are ~$5 on an average total HDD ASP of ~$45). Recent talk of -10%+ HDD ASP declines for 4Q puts significant pressure on Nidec to increase the size of its quarterly price cuts.
The rest of Nidec's operating income is: ~15% optical components (digital camera shutter and lens components for cameras / phones); ~10% machinery automation components (industrial robot applications); and the remainder is "mid-sized" motors (home appliances, automotive systems, etc.) Nidec has ambitious plans to significantly increase its non-HDD motors business through acquisitions (recently paid ~$760M / ~10.5x EBIT to acquire EMR's appliance and tools motors business, a ~7% EBIT margin business post-synergies).
Mkt Cap is $13.4B USD, EV is ~$15B USD (PF for a recent $720M cash acquisition from EMR), and revs are ~$8.3B USD. Liquidity is ~$90M USD /day.
Updated analyst estimates of the HDD market are well below Nidec's last guidance #'s for the overall market:
HDD Unit Forecasts, Million Units of Sales
Cal 3Q10
Cal 4Q10
Comment
Nidec's 7/23 Guidance
170
185
Gartner's 9/10 Lowered Estimate
165
172
Barclays 9/10 Lowered Estimate
165
172
Lowered 4Q from 177.
Avian's 9/15 Lowered Estimate
160
Would be a "near flat" comparison to Q2.
Normal seasonality is +10-15%.
Average
163
172
Nidec's Divergence from Updated Avg Estimates
4%
8%
On top of this, street EPS estimates for FY10 3/11 of ¥502 are already ¥50 higher than Nidec's EPS guidance of ¥452. The street is assuming that Nidec's guidance is conservative and also likely estimating future acquired revenues.
Tablet PCs could be an incremental 25-30M units of demand next year, erasing 1/3 of the 10-12% average HDD unit growth rate over the last 5 years. In the last few weeks, RSH and some U.S. HDD co.'s have mentioned greater-than-expected 2H PC unit weakness, partially from consumers delaying purchases to assess the new tablet PC offerings. BBY's CEO mentioned on 9/15 that iPads alone had cannibalized as much as of 50% PC volumes: (http://online.wsj.com/article/SB10001424052748703376504575491533125103528.html?KEYWORDS=retailers+turn+to+gadgets#printMode). That would be a much more draconian scenario in consumer HDD volumes than what is needed to make this short work.
Valuation on Street Estimates:
Nidec
Yen
USD
Price
¥7,500
Shrs Out
145.1
Mkt Cap
¥1,088,063
$13,109
Add: Debt
¥131,601
Add: Minority Int
¥59,592
Add: New Convert Debt
¥100,000
Note: 0% interest rate, strike is ~40% premium for ~6.5% dilutive effect.
Gross Debt
¥231,601
$2,790
Less: Cash
¥127,374
Less: EMR Motors Deal Prc
¥63,080
$760
Less: Cash from New Convert
¥100,000
Gross Cash
¥164,294
$1,979
EV
¥1,214,962
$14,638
Note: Net Debt
¥67,307
$811
Street
Street
Street
FY 3/2006
FY 3/2007
FY 3/2008
FY 3/2009
FY 3/2010
FY 3/2011
FY 3/2012
FY 3/2013
Revs
¥536,858
¥629,667
¥742,126
¥613,458
¥587,459
¥692,953
¥752,958
¥800,915
Gross Profit
¥123,846
¥143,040
¥158,216
¥130,565
¥151,122
% Sales
23.1%
22.7%
21.3%
21.3%
25.7%
EBIT
¥53,426
¥64,009
¥76,833
¥51,806
¥78,342
¥110,481
¥124,444
¥134,828
% Sales
10.0%
10.2%
10.4%
8.4%
13.3%
15.9%
16.5%
16.8%
EBITDA
¥79,711
¥94,006
¥113,167
¥83,953
¥107,527
¥150,691
¥167,784
¥184,024
EBITDA - CapEx
¥36,526
¥54,862
¥77,507
¥45,452
¥70,919
¥85,691
¥122,784
¥139,024
FCF (NI + D&A - CapEx)
¥24,049
¥30,785
¥41,830
¥21,999
¥44,538
¥34,579
¥66,198
¥71,862
CapEx
-¥43,185
-¥39,144
-¥35,660
-¥38,501
-¥36,608
-¥65,000
-¥45,000
-¥45,000
Net Income
¥40,949
¥39,932
¥41,156
¥28,353
¥51,961
¥70,394
¥82,013
¥87,677
EPS
¥276
¥284
¥197
¥373
¥496
¥578
¥620
Multiples
EV / Revs
2.1x
1.8x
1.6x
1.5x
EV / EBIT
15.5x
11.0x
9.8x
9.0x
EV / EBITDA
11.3x
8.1x
7.2x
6.6x
EV / EBITDA - CapEx
17.1x
14.2x
9.9x
8.7x
P / E
20.1x
15.1x
13.0x
12.1x
EV / FCF
27.3x
35.1x
18.4x
16.9x
Growth
Sales Grwth %
17%
18%
-17%
-4%
18%
9%
6%
EBIT Grwth %
20%
20%
-33%
51%
41%
13%
8%
Scenario Model:
Scenarios, FY11 3/12E
3 Yr Avg
FY09 3/10
FY10 3/11
Bad - Street
Base
Best
Rev
¥640,874
¥587,459
¥692,953
¥752,784
¥710,825
¥647,674
2 Yr Rev Grwth Rate
13%
10%
5%
EBIT %
10.8%
13.3%
15.9%
16.5%
11.5%
10.5%
EBIT
¥69,251
¥78,342
¥110,481
¥124,209
¥81,745
¥68,006
EBITDA
¥102,710
¥108,722
¥107,527
¥167,709
¥125,245
¥111,506
Capex
¥33,693
¥29,359
¥65,000
¥45,000
¥45,000
¥45,000
EBITDA - CapEx
¥69,016
¥79,363
¥85,691
¥122,709
¥80,245
¥66,506
EPS
¥197
¥373
¥496
¥583
¥381
¥310
EV/EBITDA - CapEx
17.1x
14.2x
11.0x
11.0x
10.0x
Price Target
¥8,840
¥5,620
¥4,120
Implied P/E
20.1x
15.1x
15.2x
14.7x
13.3x
Implied EV/EBITDA
11.3x
8.1x
8.4x
7.6x
6.6x
Return
-18%
25%
45%
Up/down:
2.5x
Probability
30%
40%
30%
Wtd Avg Price Target
¥6,136
Bad / Street: 13% total rev growth (assumes 5 yr avg 11% HDD unit growth continues and pricing is -5%) for 6% base rev growth annually. Rest of revenue (90B Yen) comes from acquisitions, assuming a similar rev multiple as paid for EMR motors (and using the cash from the Nov '10 100B convert issue). On EBIT % margin, street assumes growth (above mgmt guidance for a decline) and that the acquired revenue is close to Nidec average EBIT % margin.
Base: Assumes 8% HDD unit growth , -5% pricing for 3% base rev growth (+ the same amount acquired revenue). Assume EBIT% margin contraction to near 3 year average.
Best: Assumes 3% HHD unit growth, -5% pricing, + same amount of acquired revenue. Assumes additional ~50bp of EBIT % pressure in the HDD business and that acquired revenue (~13% of mix) is EBIT margin dilutive in a similar amount to the EMR motors acquisition. (~400bp lower margin x 13% of mix).
CapEx & D&A assumpions used were from conversation w/ IR.
Comps:
P/E
EV / EBITDA
Price
Mkt Cap
Net Debt
EV
FY10
FY11
FY12
FY10
FY11
FY12
Nidec
6594 JP
¥7,500
¥1,088,063
¥4,227
¥1,214,962
15.1x
13.0x
12.1x
8.1x
7.2x
6.6x
Japanese HDD Food Chain Comps:
TDK, 100% HDD
6762 JP
¥4,825
¥622,869
¥53,129
¥676,070
12.4x
10.7x
9.7x
4.4x
4.2x
4.0x
NHK ~50% HDD
5991 JP
¥646
¥152,941
¥26,867
¥179,939
8.6x
7.9x
7.7x
3.5x
3.4x
3.1x
U.S. HDD Companies:
Western Digital
WDC
$27.90
$6,557
-$2,334
$4,223
7.7x
6.6x
6.7x
2.6x
2.6x
2.4x
Seagate
STX
$11.49
$5,745
-$13
$5,732
5.6x
5.1x
4.7x
3.1x
2.8x
2.9x
Mid-Sized / Appliance Motors Comps:
Baldor
BEZ
$41.42
$1,971
$1,110
$3,080
24.0x
16.7x
14.2x
9.8x
8.4x
7.7x
Regal-Beloit
RBC
$56.43
$2,198
$101
$2,316
13.6x
11.9x
10.7x
6.9x
6.1x
5.7x
EV / EBITDA - CapEx
GP %
EBIT %
Rev Grwth
FY10
FY11
FY12
CY09
CY09
TTM
Last Qtr
Nidec
6594 JP
10.6x
11.8x
10.2x
26%
13%
-4%
38%
Japanese HDD Food Chain Comps:
6762 JP
7.6x
7.0x
6.3x
24%
3%
11%
52%
5991 JP
5.1x
4.9x
4.4x
13%
5%
-8%
45%
U.S. HDD Companies:
WDC
4.9x
4.8x
4.1x
24%
15%
32%
66%
STX
4.7x
4.1x
4.3x
28%
16%
16%
42%
Mid-Sized / Appliance Motors Comps:
BEZ
11.5x
9.6x
8.6x
29%
12%
RBC
7.6x
6.7x
6.2x
23%
9%
Catalyst
H1 9/10 earnings report on 10/26 & the possibility of lower revised guidance.
Further confirmation of weak PC volumes in 2H from companies in the value chain.
sort by
Description
Thesis: We believe that a great migration from HDDs to flash-based / SSD-based devices has begun. This makes Nidec a great secular short as it is the last member of the HDD food chain to retain a growth valuation (best case ~5% normalized FCF yield). A near term catalyst could be Oct-end earnings, where management will likely have to revise its aggressive 4Q unit guidance lower (based on very negative recent datapoints in the PC & HDD supply chain). Strong cannibalization of HDD-based notebook demand by the iPad and other tablets, which to date, all use Flash-based memories (NAND) and not HDDs, will result in lower PC volumes and greater price competition in notebooks / HDDs. This should eventually create volume headwinds and more than usual pricing pressure for component suppliers. As a result, Nidec will miss out year consensus numbers and/or see multiple compression, as it trades at a very large premium to the public HDD manufacturers (STX and WDC). We have passed the critical point of flash being cost competitive with HDDs on 64G - 128G consumer notebooks, and Nidec has admits that as much as 50% of the end markets for its motors are in consumer devices. The power consumption, speed, and stability benefits of SSD are allowing it to being to cannibalized the enterprise HDD sector as well.
Description: ~65% of Nidec's EBIT comes from selling HDD motors and other PC components (cooling fans, etc.). This is the company's highest margin business (~18% EBIT margin vs overall Co. at 13 % margin), and it is dominated by "brushless" (electronic) / spindle motors that go into standard 2.5" (notebook) and 3.5" (desktop) HDDs. This motor technology has not significantly changed since the 80s. Nidec's HDD market share was ~60% in 2004 and has gradually increased (to close to 80%) through the downturn w/ industry capacity reductions. There is not an outsized #2 competitor, but Minebea and Alphana Technology have competing HDD motors. As a % of HDD motor sales, Nidec's sales split mirrors the HDD industry: STX is 31%, WDC is 30%, Hitachi is 21%, and Samsung and Toshiba are the other two significant customers. The majority of Nidec's HDD motor sales are conducted just-in-time, with quarterly pricing. Even though Nidec has 80% market share in HDD motors, it is continuing to cut prices 1-2% q/q every quarter, in order to "stay on the good side of the HDD co's" (Nidec's HDD motor ASPs are ~$5 on an average total HDD ASP of ~$45). Recent talk of -10%+ HDD ASP declines for 4Q puts significant pressure on Nidec to increase the size of its quarterly price cuts.
The rest of Nidec's operating income is: ~15% optical components (digital camera shutter and lens components for cameras / phones); ~10% machinery automation components (industrial robot applications); and the remainder is "mid-sized" motors (home appliances, automotive systems, etc.) Nidec has ambitious plans to significantly increase its non-HDD motors business through acquisitions (recently paid ~$760M / ~10.5x EBIT to acquire EMR's appliance and tools motors business, a ~7% EBIT margin business post-synergies).
Mkt Cap is $13.4B USD, EV is ~$15B USD (PF for a recent $720M cash acquisition from EMR), and revs are ~$8.3B USD. Liquidity is ~$90M USD /day.
Updated analyst estimates of the HDD market are well below Nidec's last guidance #'s for the overall market:
HDD Unit Forecasts, Million Units of Sales
Cal 3Q10
Cal 4Q10
Comment
Nidec's 7/23 Guidance
170
185
Gartner's 9/10 Lowered Estimate
165
172
Barclays 9/10 Lowered Estimate
165
172
Lowered 4Q from 177.
Avian's 9/15 Lowered Estimate
160
Would be a "near flat" comparison to Q2.
Normal seasonality is +10-15%.
Average
163
172
Nidec's Divergence from Updated Avg Estimates
4%
8%
On top of this, street EPS estimates for FY10 3/11 of ¥502 are already ¥50 higher than Nidec's EPS guidance of ¥452. The street is assuming that Nidec's guidance is conservative and also likely estimating future acquired revenues.
Tablet PCs could be an incremental 25-30M units of demand next year, erasing 1/3 of the 10-12% average HDD unit growth rate over the last 5 years. In the last few weeks, RSH and some U.S. HDD co.'s have mentioned greater-than-expected 2H PC unit weakness, partially from consumers delaying purchases to assess the new tablet PC offerings. BBY's CEO mentioned on 9/15 that iPads alone had cannibalized as much as of 50% PC volumes: (http://online.wsj.com/article/SB10001424052748703376504575491533125103528.html?KEYWORDS=retailers+turn+to+gadgets#printMode). That would be a much more draconian scenario in consumer HDD volumes than what is needed to make this short work.
Valuation on Street Estimates:
Nidec
Yen
USD
Price
¥7,500
Shrs Out
145.1
Mkt Cap
¥1,088,063
$13,109
Add: Debt
¥131,601
Add: Minority Int
¥59,592
Add: New Convert Debt
¥100,000
Note: 0% interest rate, strike is ~40% premium for ~6.5% dilutive effect.
Gross Debt
¥231,601
$2,790
Less: Cash
¥127,374
Less: EMR Motors Deal Prc
¥63,080
$760
Less: Cash from New Convert
¥100,000
Gross Cash
¥164,294
$1,979
EV
¥1,214,962
$14,638
Note: Net Debt
¥67,307
$811
Street
Street
Street
FY 3/2006
FY 3/2007
FY 3/2008
FY 3/2009
FY 3/2010
FY 3/2011
FY 3/2012
FY 3/2013
Revs
¥536,858
¥629,667
¥742,126
¥613,458
¥587,459
¥692,953
¥752,958
¥800,915
Gross Profit
¥123,846
¥143,040
¥158,216
¥130,565
¥151,122
% Sales
23.1%
22.7%
21.3%
21.3%
25.7%
EBIT
¥53,426
¥64,009
¥76,833
¥51,806
¥78,342
¥110,481
¥124,444
¥134,828
% Sales
10.0%
10.2%
10.4%
8.4%
13.3%
15.9%
16.5%
16.8%
EBITDA
¥79,711
¥94,006
¥113,167
¥83,953
¥107,527
¥150,691
¥167,784
¥184,024
EBITDA - CapEx
¥36,526
¥54,862
¥77,507
¥45,452
¥70,919
¥85,691
¥122,784
¥139,024
FCF (NI + D&A - CapEx)
¥24,049
¥30,785
¥41,830
¥21,999
¥44,538
¥34,579
¥66,198
¥71,862
CapEx
-¥43,185
-¥39,144
-¥35,660
-¥38,501
-¥36,608
-¥65,000
-¥45,000
-¥45,000
Net Income
¥40,949
¥39,932
¥41,156
¥28,353
¥51,961
¥70,394
¥82,013
¥87,677
EPS
¥276
¥284
¥197
¥373
¥496
¥578
¥620
Multiples
EV / Revs
2.1x
1.8x
1.6x
1.5x
EV / EBIT
15.5x
11.0x
9.8x
9.0x
EV / EBITDA
11.3x
8.1x
7.2x
6.6x
EV / EBITDA - CapEx
17.1x
14.2x
9.9x
8.7x
P / E
20.1x
15.1x
13.0x
12.1x
EV / FCF
27.3x
35.1x
18.4x
16.9x
Growth
Sales Grwth %
17%
18%
-17%
-4%
18%
9%
6%
EBIT Grwth %
20%
20%
-33%
51%
41%
13%
8%
Scenario Model:
Scenarios, FY11 3/12E
3 Yr Avg
FY09 3/10
FY10 3/11
Bad - Street
Base
Best
Rev
¥640,874
¥587,459
¥692,953
¥752,784
¥710,825
¥647,674
2 Yr Rev Grwth Rate
13%
10%
5%
EBIT %
10.8%
13.3%
15.9%
16.5%
11.5%
10.5%
EBIT
¥69,251
¥78,342
¥110,481
¥124,209
¥81,745
¥68,006
EBITDA
¥102,710
¥108,722
¥107,527
¥167,709
¥125,245
¥111,506
Capex
¥33,693
¥29,359
¥65,000
¥45,000
¥45,000
¥45,000
EBITDA - CapEx
¥69,016
¥79,363
¥85,691
¥122,709
¥80,245
¥66,506
EPS
¥197
¥373
¥496
¥583
¥381
¥310
EV/EBITDA - CapEx
17.1x
14.2x
11.0x
11.0x
10.0x
Price Target
¥8,840
¥5,620
¥4,120
Implied P/E
20.1x
15.1x
15.2x
14.7x
13.3x
Implied EV/EBITDA
11.3x
8.1x
8.4x
7.6x
6.6x
Return
-18%
25%
45%
Up/down:
2.5x
Probability
30%
40%
30%
Wtd Avg Price Target
¥6,136
Bad / Street: 13% total rev growth (assumes 5 yr avg 11% HDD unit growth continues and pricing is -5%) for 6% base rev growth annually. Rest of revenue (90B Yen) comes from acquisitions, assuming a similar rev multiple as paid for EMR motors (and using the cash from the Nov '10 100B convert issue). On EBIT % margin, street assumes growth (above mgmt guidance for a decline) and that the acquired revenue is close to Nidec average EBIT % margin.
Base: Assumes 8% HDD unit growth , -5% pricing for 3% base rev growth (+ the same amount acquired revenue). Assume EBIT% margin contraction to near 3 year average.
Best: Assumes 3% HHD unit growth, -5% pricing, + same amount of acquired revenue. Assumes additional ~50bp of EBIT % pressure in the HDD business and that acquired revenue (~13% of mix) is EBIT margin dilutive in a similar amount to the EMR motors acquisition. (~400bp lower margin x 13% of mix).
CapEx & D&A assumpions used were from conversation w/ IR.
Comps:
P/E
EV / EBITDA
Price
Mkt Cap
Net Debt
EV
FY10
FY11
FY12
FY10
FY11
FY12
Nidec
6594 JP
¥7,500
¥1,088,063
¥4,227
¥1,214,962
15.1x
13.0x
12.1x
8.1x
7.2x
6.6x
Japanese HDD Food Chain Comps:
TDK, 100% HDD
6762 JP
¥4,825
¥622,869
¥53,129
¥676,070
12.4x
10.7x
9.7x
4.4x
4.2x
4.0x
NHK ~50% HDD
5991 JP
¥646
¥152,941
¥26,867
¥179,939
8.6x
7.9x
7.7x
3.5x
3.4x
3.1x
U.S. HDD Companies:
Western Digital
WDC
$27.90
$6,557
-$2,334
$4,223
7.7x
6.6x
6.7x
2.6x
2.6x
2.4x
Seagate
STX
$11.49
$5,745
-$13
$5,732
5.6x
5.1x
4.7x
3.1x
2.8x
2.9x
Mid-Sized / Appliance Motors Comps:
Baldor
BEZ
$41.42
$1,971
$1,110
$3,080
24.0x
16.7x
14.2x
9.8x
8.4x
7.7x
Regal-Beloit
RBC
$56.43
$2,198
$101
$2,316
13.6x
11.9x
10.7x
6.9x
6.1x
5.7x
EV / EBITDA - CapEx
GP %
EBIT %
Rev Grwth
FY10
FY11
FY12
CY09
CY09
TTM
Last Qtr
Nidec
6594 JP
10.6x
11.8x
10.2x
26%
13%
-4%
38%
Japanese HDD Food Chain Comps:
6762 JP
7.6x
7.0x
6.3x
24%
3%
11%
52%
5991 JP
5.1x
4.9x
4.4x
13%
5%
-8%
45%
U.S. HDD Companies:
WDC
4.9x
4.8x
4.1x
24%
15%
32%
66%
STX
4.7x
4.1x
4.3x
28%
16%
16%
42%
Mid-Sized / Appliance Motors Comps:
BEZ
11.5x
9.6x
8.6x
29%
12%
RBC
7.6x
6.7x
6.2x
23%
9%
Catalyst
H1 9/10 earnings report on 10/26 & the possibility of lower revised guidance.
Further confirmation of weak PC volumes in 2H from companies in the value chain.
Messages
Subject
RE: thoughts on results
Entry
11/03/2010 09:26 PM
Member
gary9
Results confirmed the thesis in several respects. But who says short selling rewards being correct? I guess it got too popular and went against the crowd at least in the short term.
Are you sure you want to close this position Nidec?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Flag Nidec for Removal
Are you sure you want to Flag this idea Nidec for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You Cannot Submit Message ... Yet
You currently do not have message posting privilages, there are
1 way you can get the privilage.
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.