Description

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: 

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. 

 Scenario Model:

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.

Catalyst

Further confirmation of weak PC volumes in 2H from companies in the value chain.