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Corporate Analysis: Keyence Corp

Shareholders of highly profitable Keyence unsatisfied with recent dividend increase

  • April 2, 2007

Keyence Corp, a leading supplier of sensors for factory automation (FA) and measuring instruments, is called a “fiercely profitable company,” and its steep growth does not show any signs of abating.

Its annual sales for FY2006 (which ended March 2007) are expected to reach 187 billion yen, up 18.1% from the previous year, and its operating profit, 96 billion yen, up 17.9%. The ratio of operating profit to net sales is expected to top 50% for the fourth consecutive year. While maintaining a double-digit revenue increase, Keyence is steadily expanding its profit.

The main reason for the Osaka-based company’s high profitability is its strong research and development (R&D) program, which enables the firm to introduce high value-added products. The fact that the new products released within the past two years account for more than 30% of all its products indicates the strength of its R&D capabilities.

Coupled with its aggressive marketing and sales activities, through which the company clearly discerns the needs of its corporate customers, its strong R&D power is contributing to Keyence’s remarkable performance.

Some stock market players have expressed a concern that Keyence’s snowballing research and development costs may depress the company’s profit sooner or later. However, the concern has been proven to be groundless so far. Currently, Keyence’s annual R&D costs total around 5 billion yen, twice the level of seven years earlier. But its annual sales and profits are growing at a faster pace, and this is why the massive R&D costs aren’t a problem.

Keyence performing well in overseas markets

How long will Keyence’s sharp growth continue?

“Currently, there are no major factors that would negatively affect the company’s performance,” said Yuji Akiyama, an analyst at Nomura Securities Co’s Financial & Economic Research Center (FERC).

In addition to the fact that the share of new products continues to exceed 30% of the total, the steady growth of its revenues in overseas markets seems to be guaranteeing sustainable brisk growth of Keyence’s business, said Akiyama.

Although Keyence’s domestic sales posted an 11.8% year-on-year increase in FY2005 (which ended March 2006), its overseas sales posted a much higher growth rate of 28.7%.

Nomura’s FERC estimates the growth rate of Keyence’s overseas sales for FY2006 to be slightly higher than a year earlier. This rate is far higher than the 13.7% for its domestic sales estimated by FERC. According to the research center, this trend is likely to continue for some time, and the share of overseas sales in Keyence’s total sales will rise from 22.5% in FY2005 to 28.3% in FY2008 (ending March 2009).

This figure is very close to the company’s short-term target of 30%. Keyence plans to push up the percentage of overseas sales to around 50% in the future.

It is quite certain that the domestic market will come closer to a saturation point soon. To what extent will Keyence be able to raise the percentage of its overseas sales while maintaining its high profitability may become a major factor for predicting its future growth prospects.

Keyence is not generous to its shareholders

Despite the steady growth of its business, Keyence’s stock price closed at 26,950 yen on March 20, and its group’s estimated price-earnings ratio (PER) is 22.9. Even after adjusting for its stock splits, its PER remains below the peak level registered at the time of the IT bubble economy in early 2000.

According to QUICK consensus, the Keyence group’s estimated earnings per share (EPS) registers 1,174.14 yen, up 6.3% from 1,104.82 yen for the previous year. In spite of this favorable data, Keyence, known for its debt-free business strategy and massive cash reserves, has been under fire in the stock market for “ineffective use of its capital.”

In an attempt to address such criticism from its shareholders, Keyence announced on March 5 that it would increase its annual dividend from the previous year’s 20 yen to 40 yen. Admittedly, this is a large percentage increase in the dividend. But many shareholders are of the opinion that Keyence can afford to pay a much higher dividend, judging from the extremely high level of its profit.

In fact, its share price has not responded much to the announcement. A prevailing view in the market is that Keyence is unlikely to change its strategy concerning its shareholders’ equity for the benefit of the investors because it has many strong shareholders, such as its chairman Takemitsu Takizaki.

A factor that may adversely affect Keyence’s future performance is the trends of corporate investment in plants and equipment. In the wake of the collapse of IT bubble, Keyence’s annual sales for FY 2001 fell sharply from a year earlier, by 20%, and its operating profit, by 30%.

Learning a lesson from this bitter experience, Keyence is diversifying its business into the automobile and machinery sectors in an attempt to alleviate the negative influence of the possible contraction of corporate investment in plants and equipment. Yet, there is a limit to this effort.

The global stock market debacle in late February, originated from China, brought to light the vulnerability of the global economy. The sinking prices of digital products, such as flat TV sets, may trigger a business slowdown, and Keyence may have to keep an eye on this trend as well.

Some substantial danger could be hidden in business areas where Keyence has no control at all.

(Jun Ishikawa, Staff Writer, Nikkei Business)


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