Industrial Robotics Industry Facing Headwinds but Fanuc Well-Positioned for Mid-Term Growth

Equity Analyst

Jason Kondo

Fanuc is well positioned for long-term, secular growth in the factory automation and industrial robotics industry, as the world’s largest computer numerical control and industrial robotics manufacturer. The FA division currently makes up approximately one third of total sales and has the leading global market share with its CNCs, which is the automated control software of machine tools. With an established reputation and record that supports its ability to maintain a 50% market share, we expect this business to grow along with its machine tool manufacturer customers, as the software/control console will differentiate the quality of machine tools and meet increasing demands for extremely high precision by end-users. 

The robot division is Fanuc's largest business by sales, and the company is considered one of the big four in the industrial robotics space. The growth of the industrial robotics industry is being underpinned by secular trends like decreasing labor force from aging population in developed countries, as well as increasing wage levels in key markets like China. As FA continues to grow across a variety of industries, Fanuc will be able to provide its robots to not just its current main customer base like the automotive and electronics industries (for example General Motors, Audi, Panasonic), but will be able to further expand its customer base in other industries such as food and pharmaceuticals. 

Fanuc’s Robodrills, which are compact machining centers used to cut and shape metal objects such as the casings of smartphones, are the top contributor to its robomachine division. While the business was able to contribute to 40% of total revenues in 2014 (with more than 80% from Asia) due to a major demand spike in smartphone demand, we believe the demand for Robodrills will not reach peak levels in the future. However, we believe the robomachine division will further diversify its customer base into other industries and continue to grow at a relatively stable rate over the medium term.

Business Strategy & Outlook

We assign Fanuc a wide moat rating, supported by switching costs and intangible assets. The company has the leading global market share in both the CNC and robot segment, which is estimated at 50% and above 20% respectively. Fanuc’s wide moat, supported by factors such as high switching costs and intangible assets, has led the company to being able to maintain its top share over the long term. 

Switching Cost: Primary Wide Moat Source

Fanuc’s largest moat source is switching costs. For the customers of Fanuc, any type of breakdown leads to a loss in productivity, which can ultimately lead to an inability to deliver services to customers as well as an economic loss. For most manufacturers, unplanned downtime is the single largest contributor to lost production time and according to a study conducted by the International Society of Automation, downtime costs the global manufacturing industry approximately USD 647 billion every year. Companies investing in factory automation equipment would more likely choose vendors where they are accustomed to the vendor’s products to minimize risk, rather than dealing with the uncertainty of switching vendors and dealing with a new product they have not worked with.

Another factor for high switching costs, besides avoidance of potential loss in productivity, is that both the suppliers and the customers have mutually increased their respective knowledge about each other’s products and business operations. As the factory automation suppliers (for example Fanuc) become more “entrenched” in their customers’ factories by supplying products and providing services, they develop a stronger understanding of their customers’ manufacturing operations and develop specific expertise that allow the suppliers to provide better manufacturing solutions for their customers. From the customers’ standpoint, they have invested time to learn about their existing supplier’s products by receiving education from their suppliers and have developed the operational know-how to use the product(s) effectively as well as solve minor product issues. This mutual learning curve that develops over time creates significant switching cost for customers as they would have to start over if they choose to switch vendors.

Intangible Asset: Second Wide Moat Source

Fanuc’s intangible assets (track record, reputation, brand) play a major role in the decision-making of manufacturing companies looking to procure robots, machine tools, and other factory automation-related equipment. Its customers, such as automobile manufacturers, must be able to minimize unplanned downtime and have complex manufacturing processes that assemble various types of parts; in fact, according to Toyota, a single car has about 30,000 parts. Furthermore, the parts manufacturers, who also use Fanuc’s CNCs and/or Robomachines, must be able to shape these parts with perfect precision, which is where CNC and servo technologies for robotics and machine tools become crucial. In other words, the slightest mistake in shaping the parts or error in the automation process can ultimately lead to significant economic loss. As most potential customers are risk averse and cannot accept additional costs from unplanned downtime, they will look for evidence of credibility (for example, track record) to eliminate any potential risks of additional economic costs from downtime.

Relationships between the supplier and the customer play a key role in the automation space, especially as factory automation becomes increasingly complex and requires more communication between the parties. The company currently has approximately 260 service centers worldwide that are available 24 hours a day, seven days a week to keep its robots and machines in operation globally, while providing lifetime maintenance to its products. The average life span of Fanuc’s CNC is 20.2 years, so throughout the years of customers owning the CNCs, relations between the service staff and customers are developed, which is a key source of the company’s intangible asset. We expect Fanuc’s service business to play a larger role for Fanuc due to increasing automation complexities from integrating "Internet of Things" technology to Fanuc’s robots/machines, which will then contribute to the company’s long-term ability to maintain high adjusted ROIC.

Environmental, Social, and Governance Risks

We do not think Fanuc faces material ESG-related risks that can impact its economic moat. However, similar to all industrial equipment/component companies, the company is subject to risks related to product governance and safety, as these risks come from both technological and human errors. Fanuc has internal management practices in place to mitigate risks related to safety, where its employees receive training on product safety and the company has defect management systems to deal with production incidents. Similar to its competitors, the company faces risks related to intellectual property (as FA companies including Fanuc have been accused of patent infringement in the U.S.), data security from the increasing influence of the Internet of Things, environmental issues, and corporate governance such as from cross-shareholdings. While Fanuc’s moat and uncertainty ratings will likely remain unchanged for the foreseeable future, we will consider changing our bear case scenario to reflect ESG risks, if there are stronger signs of materiality in penalties coming from its pending lawsuits. Over the past decade, the company has not incurred any extraordinary losses stemming from ESG risks.

Wide

Economic Moat

FANUC Corp

Earnings data Q4 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

FANUC Corp. engages in the development, manufacture, sale, and maintenance of computer numerical control (CNC) systems, lasers, robot systems, robomachines, robocop, robocut and nano robots. It operates through the following divisions: Factory Automation (FA), Robot, and Robomachine. The FA division provides products that enable factory automation, such as CNCs, which control machine tools with numerical information, servos and laser oscillators. The Robot division tasks can be automated by applying the basic technologies of CNCs and servos freely controlling robot arms. The Robomachine division develops compact machining centers, electric injection molding machines, wire electrical-discharge machines that apply the basic technologies of CNCs and servos. The company was founded by Seiuemon Inaba in 1955 and is headquartered in Minamitsuru-gun, Japan.

Mitsubishi Electric Corp

Christian Heck of First Eagle makes the case that Japan's stock market is still inexpensive as its companies improve

Why Japan's stock market could keep soaring — plus three stock picks there

Ambev

Adyen NV

Allegion

Assa Abloy AB

AstraZeneca

Alibaba

Baidu

British American Tobacco

Anheuser-Busch InBev

Cie Financiere Richemont SA

GlaxoSmithKline

Imperial Brands PLC

JD.com

Kao Corp

Medtronic

Nestle SA

Our 3-step process focuses on wide-moat stocks (as per Morningstar's rating). We are only interested in those targets that are attractively valued in historical comparison.

International Wide-Moat Stocks On Sale - The February 2024 Heat Map

Oracle

Exxon Mobil

Prosus NV

What are big money managers worried about? “The problem is we're priced for a soft landing.

Five-star fund manager bets on cheap AI, beer and China plays

Fanuc Corporation pays out a reasonably high proportion (60%) of its earnings as dividends, and the company is targeting to achieve JPY50 billion of share repurchases for full-year FY 2023. The company's financial performance in the near term is likely to be poor due to destocking headwinds, and weak automation demand for the Chinese market. My investment rating for Fanuc Corporation stock is a Hold based on my assessment of the company's shareholder return and financial outlook.

Fanuc Corporation: Watch Capital Return And Financial Prospects

The consensus financial estimates for Fanuc Corporation have been revised downwards, despite the fact that the company's recent quarterly results were better than what the market anticipated. Inventory issues have led to concerns about FANUY's future orders and revenues, and this is the reason for the cut in consensus numbers for the company. I still award a Hold rating to Fanuc Corporation; FANUY isn't a Sell despite the inventory overhang, as I have a positive opinion of its Service business' growth potential.

Fanuc: Inventory Overhang In The Spotlight

Bayer AG

Diageo

Novozymes A/S

Omron Corp

Roche Holding AG

Safran SA

Shimano Inc

Our 3-step process focuses on wide-moat stocks (as per Morningstar's rating). We are only interested in those targets that are attractively valued in historical comparison. We share the heat map of the most investable candidates that may be worth your time for further analysis.

International Wide-Moat Stocks On Sale - The October 2023 Heat Map

Hexagon AB

IPG Photonics

Littelfuse

Rockwell Automation

Teledyne Technologies

While artificial intelligence stocks have seen a meteoric rise in recent months, there are still some underappreciated opportunities in the broader technology sector. Specifically, robotics stocks remain overlooked by many investors, even as the need for automation and robotics solutions continues to accelerate.

The 7 Best Robotics Stocks to Buy Now: September 2023

Sanofi

Taiwan Semiconductor Manufacturing

Our 3-step process focuses on wide-moat stocks (as per Morningstar's rating). We are only interested in those targets that are attractively valued in historical comparison. We share the heat map of the most investable candidates that may be worth it.

International Wide-Moat Stocks On Sale - The August 2023 Heat Map

ABB Ltd

Teradyne

Artificial intelligence (AI) has empowered robots to carry out many tasks that were previously impossible for them. Among these capabilities are helping human customers in stores, picking produce and serving beverages.

3 Millionaire-Maker Robotics Stocks to Buy Before the Window Closes

Bionano Genomics

PNC Financial Services

XPeng

Interactive Brokers

MarketAxess Holdings

SolarEdge Technologies

There are multiple signs that inflation is rolling over, while consumer spending remains strong and corporate earnings are beating expectations. Meanwhile, the so-called credit crunch many investors have feared really isn't materializing.

7 Stocks That Could Skyrocket in the Next 12 Months

Fanuc is in an industry expected to witness sustained tailwinds. The company has a reputation for making products that are strong, rugged, and precise.

Fanuc Is Worth Buying If This Economic Slowdown Provides A Dip

Here is how Fanuc Corp. (FANUY) and Global Industrial (GIC) have performed compared to their sector so far this year.

Is Fanuc (FANUY) Outperforming Other Industrial Products Stocks This Year?

The key positives for Fanuc Corporation are its attractive valuations and the favorable change in analyst sentiment. Fanuc's key negatives relate to its modest pricing power and the challenges in cross-selling its products.

Fanuc Corporation Has A Balanced Risk-Reward Profile (Rating Upgrade)

ABB Ltd.

Alphabet

Intuitive Surgical

Trimble

Although the current volatility in the market opened doors for contrarian speculation, investors may be better served targeting their stocks to buy in the robotics space. According to MarketsandMarkets.com, just the industrial robotics segment may reach a valuation of $30.8 billion by 2027.

The Robots Are Coming! 7 Stocks to Buy Before They Boom.

iRhythm Technologies

NVIDIA

UiPath

The robotics industry has been growing at an incredible pace, and the computing power needed for these mechatronic devices is getting cheaper by the day. The increased computing power and data handling capabilities of mechatronic devices are allowing them new actions that previously weren't possible for humans.

7 Robotic Stocks to Buy for the Coming Robot Boom

Aurora Innovation

Elbit Systems

Northrop Grumman

ServiceNow

Without question, many companies, particularly in the manufacturing sector, are intensively utilizing robotics. And they are doing it much more so than they did 10 or 15 years ago.

The 7 Best Robotics Stocks to Buy Now

iRobot

Siemens AG

Investors looking for the best robotics stocks to buy have a lot of things to consider. In response to the global pandemic, supply-chain bottlenecks, trade issues, and geopolitical tensions, most U.S.-based businesses are looking to relocate production closer to their domestic facilities.

7 Robotics Stocks to Buy Before the “Nearshoring” Trend Takes Off in the U.S.

A leader within industrial robotics and CNC machinery based out of Japan. Fanuc is consistently a profitable company, but also one with volatility in performance despite operating in a high growth industry.

Fanuc: A Peek At This Leader In Industrial Robotics

Zebra Technologies

The most popular stocks for a robotics-based portfolio are IRBT, ISRG, and NVDA. These picks offer massive potential in this new area.

10 Robotics Stocks to Buy for 2022 and Beyond

Fanuc beat sales, profit, and order expectations in the fiscal third quarter, with management raising guidance and sounding relatively bullish on orders.

The Fanuc Story Is Getting More Interesting

Decline in installation cost of robots is accelerating the shift toward lights-out manufacturing and investors should eye on Epson (SEKEY), ABB (ABB), Fanuc (FANUY) and Rockwell Automation (ROK).

4 Stocks to Watch as Robotic Lineup Boosts Manufacturing Space

Fanuc's FY3/2021 results highlighted high free cash flow generation driven by normalizing capex and improving profitability. The book-to-bill order outlook driven by China demand is the highest seen over the last five years.

Fanuc: Improving Profitability And Strong Order Visibility

Free cash flow generation at Fanuc is set to improve significantly, after completing a five-year investment period which cost over ¥700 billion. The business model has high underlying profitability, which will be more visible with recovering sales volume and flattening spend in R&D.

Fanuc - Free Cash Flow Generation To Recover

ReWalk Robotics

Stryker

Robotics stocks are poised to grow in 2021, calling for investment in Trimble (TRMB), Rockwell Automation (ROK), ReWalk Robotics (RWLK), Fanuc Corp (FANUY) and Stryker (SYK).

Robots Will Rule 2021: 5 Stocks Poised to Benefit

Fanuc (FANUY) has seen solid earnings estimate revision activity over the past month, and belongs to a strong industry as well.

How Fanuc (FANUY) Stock Stands Out in a Strong Industry

News for FANUC Corp Stock (FANUY)