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Richard Hilgert
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Morningstar | Nissan 2Q 2018 Results Remain Weak, Outlook Confirmed; Maintaining JPY 1,480 FVE

No-moat-rated Nissan reported second-quarter fiscal 2018, ended Sept. 30, diluted earnings per share of JPY 33.35, just slightly better than the consensus of JPY 33.05 by JPY 0.30, but JPY 2.85 lower than the JPY 36.20 EPS reported last fiscal year. While consolidated revenue slid by 3%, unit volume dropped 10%, and operating profit margin contracted 160 basis points to 4.0%. The stock currently trades at a 30% discount to our JPY 1,480/$26 fair value estimates. We think the 4-star-rated shares of Nissan represent attractive value for investors relative to our expectations for cash flow and returns on invested capital.

Fiscal second-quarter 2018 consolidated revenue decreased 3% to JPY 2,816.1 billion from JPY 2,892.1 reported last year. However, consolidated operating profit before special items declined by 21% to JPY 101.2 billion compared with JPY 128.5 billion in fiscal 2017. Nissan’s fiscal second quarter was adversely impacted by inventory destocking in the U.S. and Europe, higher raw material costs, higher research and development expense and unfavorable currency translation. Nissan has been taking actions to improve the quality of sales, especially in the U.S., cutting retail incentives and reducing sales to rental fleet operators. Consequently, North America operating profit improved by 13% compared with the same period last year.

Management guidance for fiscal 2018 ending March 31, 2019, includes a 3% volume increase to 5.9 million units, a slight 0.4% revenue bump to JPY 12.0 trillion, but a 6% reduction in operating profit to JPY 540 billion with 30 basis points of margin contraction to 4.5%. The major contributor to the forecast profit decline is management’s estimate for a JPY 135 billion hit from negative currency translation. While the company expects JPY 144 billion in positive operating performance, other fiscal 2018 headwinds include JPY 44 billion incremental research and development expense and JPY 80 billion from higher raw material costs.

Including China JV on management's pro forma basis, we model a 1% increase in volume and 1% reduction in consolidated revenue. We assume greater reduction in fleet versus retail volume in our model and negative currency translation that reduces revenue by 2 percentage points relative to the percent change in unit volume. We also assume slightly more margin contraction than management, resulting in our estimated JPY 519 billion operating profit as we discount management's operating performance forecast for currency as well as raw material cost headwinds plus slightly less mix improvement versus fiscal 2017.

During the past 10 years, Nissan's consolidated operating profit margin has had a high, low, and median of 5.9% (fiscal 2015), negative 1.6% (fiscal 2008), and 4.8%, respectively. We estimate margin expansion to 4.9% at the midpoint of our five-year Stage I forecast, before contracting in years four and five into a normalized sustainable midcycle operating margin of 4.2%, 60-basis points below Nissan's 10-year median. Despite our conservative Stage I forecast, our JPY 1,480 fair value estimate represents 32% upside to current JPY 1,121 consensus price target and 44% appreciation potential from the current market price.
Underlying
Nissan Motor Co. Ltd.

Nissan Motor, along with its subsidiaries and associated companies, is engaged in the manufacture and sale of vehicles, marine products and related parts; and the provision of finance services throughout world. Co.'s principal businesses are automobile and sales financing. Automobile segment manufactures electric vehicles, sedans, sport coupes, compact cars, mini vans, SUVs, pick-up trucks, and station wagons. Co.'s principal brand names include "Leaf," "Infiniti," "Murano," "Altima," "Maxima," "Sentra," "Quest," "Cedric," "Days Roox," "e-NV200," "Note e-Power," "Caravan," "Wingroad," "GT-R," "Farilady Z, among others. Sales Financing segment provides sales financing services..

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Richard Hilgert

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