Murata Manufacturing is mainly engaged in the development, manufacture and sale of electronic components and modules in Japan, North America and certain other Asian and European countries. Co.'s products are sold mainly to electronics companies for use as components in telecommunication, computer, audio, video, automotive electronics and other electronic products. Co. is engaged in the development, manufacture and sale of electronic parts and related products, including components for capacitors and piezoelectric products, as well as modules products; the provision of welfare services, personnel services, education and training services, as well as the leasing and management of real estate.
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Forex worries and China worries combined to thump the Murata share price a few years back. Pelham Smithers draws lessons from 2015~16 in assessing the prospects for Murata's share performance in the short to medium term. The Murata “story”, combining as it does 5G and xEV booms, is an exciting one on paper, but the prosaic truth is that 5G and xEV are several years from being mainstream and meanwhile these other factors pose a risk.
At the start of 2019, we were concerned that Murata’s relatively strong performance in 2018 left the shares vulnerable on a valuation basis. While peers in the Apple- (AAPL US) supply chain were trading on EV/OPs of around 10x, Murata was trading on of 13~14x. Pelham Smithers discusses the operating environment for Murata and the factors that are likely to affect earnings and whether a premium valuation is justified or not.
While we understand that Murata Manufacturing’s weak guidance may disappoint the market, we believe the company is incorporating the worst-case scenario. While the numbers assume that demand will not recover after the ongoing inventory adjustment, Murata Manufacturing’s confidence to the long-term demand is intact, in our view. In fact, although Murata forecasts that revenue will remain flat and operating income will decline 18% for the new fiscal year, the company plans to continue aggressive capital expenditure, spending JPY 300 billion, or 19% of its revenue to increase production capacity ...
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