The season for announcing financial results for domestic companies is in full swing. In addition to the current financial year’s performance forecasts, the focus will be on management initiatives that are aware of stock prices and the cost of capital as requested by the TSE. The photo was taken in February in front of a stock price board in Tokyo (2024 Reuters / Issei Kato)
TOKYO (Reuters) – The season for announcing financial results for domestic companies is in full swing. In addition to the current financial year’s performance forecasts, the focus will be on management initiatives that are aware of stock prices and the cost of capital as requested by the TSE. Japanese stocks, which have been in a lull since peaking in March, are expected to be the catalyst for a return to higher stock prices. On the other hand, as prices are still high, people are also wary of the risk of disappointment.
“The market is pricing in a significant increase in profit of around 8% for this financial year. As market expectations are high, it will likely be difficult to assess performance,” said Shingo Ide, chief stock strategist at Nissay Research Institute.
Based on LSEG market forecast data, the average profit growth rate for the current period of 480 companies covered by three or more analysts with a financial year-end in March came out to be 8.9%. Although the growth rate will be slower than the 15.3% growth rate based on market expectations for the previous financial year, it is expected to remain at a high level.
However, some believe that the announcement of financial results by domestic companies “may not be very good news” (Naoki Fujiwara, senior fund manager at Shinkin Asset Management Investment Trust). Many companies are expected to have conservative forecasts at the start of the financial year, and Fujiwara says, “The launch pad is likely to be lower than analysts expect.”
The current profit forecast for large companies and all industries, as shown in the Bank of Japan Tankan in March, is a 3.7% decline. The general opinion about the market is not to accept this as it is, but to see potential face to face. Last year, although Tankan March showed a plan for a 3.1% decline, stocks rose from April to June.
However, “the situation of stock prices is different between last year and this year,” points out Atsushi Kitazawa, deputy general manager of the investment information group in the product division of Miki Securities. Last year, the price-to-earnings ratio (PER) was around 14 times, so it did not appear to be overvalued and there was room for growth. Although the current PER has fallen from 17 times at one point, it is in the mid-16 range, close to the upper end of the range over the past five years excluding abnormal values due to the coronavirus pandemic, and “there are a few a place to take a side up” (Kitazawa) There is also a scene.
Among the top companies in terms of profit growth by sector, there are many cases where the increase is a reactive increase from the previous year’s profit drop.
Electrical equipment, including semiconductor-related products, which has been driving stock prices since the start of the year, is eighth among sectors with a profit growth rate of 17%. This is a part of the industry where profits were expected to fall in the previous financial year, and a rebound is expected to increase in the current financial year. Kazuyoshi Saito, senior analyst at Iwai Cosmo Securities, predicts “Memory investment will increase in the second half of the year, and shipments of equipment for large-scale projects in the United States will pick up steam.”
Although the market is weak at the moment, Mr. Saito predicts that if major semiconductor stocks in Japan and the United States confirm solid performance and growth potential in their financial results, “stock prices will rebound to some extent.”
The top pharmaceuticals with a profit growth rate of 52% are Astellas Pharma (4503.T) New Tab, opens a new tab and Takeda Pharmaceutical (4502.T) New Tab, opens a new tab. “Both are mainly due to the fact that they recorded impairment losses in the previous financial year,” said Hiroshi Wada, an analyst at SMBC Nikko Securities.
Other industries with the highest profit growth rates include textile products, which increased by 31%, chemicals which increased by 30%, and non-ferrous metals which increased by 26%. Regarding the chemical industry, Shigeki Okazaki, a research analyst at Nomura Securities, said, “In the previous financial year, there was an impact from customers such as the semiconductor industry, whose production was lower than final demand, but the year this financial period, as inventory adjustments are completed, shipments are in line with actual demand, it is expected to return.”
Growth in transport equipment manufactured by carmakers and other manufacturers is expected to slow to 6% from the 70% increase in the previous quarter. In the process of recovering production from the semiconductor shortage after the coronavirus pandemic, “supply and demand were tight, and the sales profit per unit was at an all-time high,” said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Lab .
As production recovery runs its course, some companies are starting to offer sales incentives, and Mr Sugiura predicts that “profitability in the core business is likely to decline.”On the other hand, as the yen continues to weaken, it is not necessary to take a pessimistic view, noting that the positive effect of exchange rates will be large.
Even if earnings growth is in line with market expectations, the Nikkei Stock Average is unlikely to reach its all-time high of 41,087 yen on March 22nd. Even if earnings per share (EPS) increased by 8.9% as expected by the market based on the current PER, the Nikkei average would remain at just under 41,000 yen.
Stock prices are determined by the product of PER and EPS. For the price to rise to a high again, speculation about US interest rate cuts, the boom in artificial intelligence (AI), foreign investors buying Japanese stocks, and domestic wage inflation will need to reignite, pushing the P/E ratio. even higher.
In this context, what attracts attention as well as the business outlook is how the company responds to TSE’s request for managers to be aware of stock prices and the cost of capital. In addition to direct shareholder returns, if specific measures are shown to improve capital efficiency, this could lead to an improvement in PER.
Mitsui Fudosan (8801.T) New Tab’s stock price rose significantly, opening a new tab, as its return on equity (ROE) and shareholder return policy were highly praised by US activist funds.
At the end of March, 65% of companies had disclosed information or were considering it, 65% of Prime companies and 26% of Standard companies. “About half of the companies have not disclosed their information yet. It has been a year since the TSE application, so I think many companies will disclose their information this time,” said Mr Ide from the Nissay Research Institute. Mr Kitazawa of Miki Securities believes there is hope for companies under consideration in their latest financial results. “In particular, companies with a price-to-book ratio (PBR) of less than 1 times attract a lot of attention,” said Kitazawa.
However, efforts to improve capital efficiency and increase shareholder returns do not necessarily lead to higher stock prices. Keisei Electric Railway (9009.T) New Tab, opens new tab announced in March that it would sell its Oriental Land (4661.T) New Tab, opens new tab shares, but the company said it was ” unsatisfactory” with only 1% of its shares outstanding (Domestic securities analyst) The stock price plummeted.
On the other hand, it can be said that the market has high expectations for the response to the TSE request. Mr. Fujiwara of Shinkin AM also pointed out the fact “I believe that stocks will be selected based on specific content, feasibility, sustainability, etc.” (Fujiwara Shinkin AM).
(Noriyuki Hirata Editing by Hiroshi Hashimoto)
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