Mitsubish Electric Earnings: The Automotive Business Is Making Progress in Its Restructuring

The main highlight of Mitsubishi Electric’s 6503, or MEC’s, September-quarter results was the automotive segment’s turn to profitability, which had been struggling with losses since 2020. In April, the company announced structural reforms, which include discontinuing its car multimedia business and focusing its resources on electrification and advanced driver-assistance systems technologies. We were previously skeptical that the business would return to profitability in this fiscal year, as the company had guided. However, we are encouraged that the business posted an operating margin of 2.0% in the September quarter, an improvement from a loss of 3.3% in the June quarter, turning profitable earlier than we had expected. In addition, the announcement of the spinoff of its automotive business enables the company to accelerate business decisions, demonstrating solid progress in its restructuring.

With a revised outlook, we raise our automotive segment’s operating margin forecasts for fiscal 2023 (ending March 2024) and 2024 to 1.0% and 2.5% from negative 2.0% and 1.0%, respectively, and lift our fair value estimate to JPY 2,200 from JPY 2,000, assuming a company operating margin of 5.7% and 7.0% for these two years. We expect MEC’s revenue to remain flat in fiscal 2023 as solid growth in automotive equipment/air conditioner sales is offset by weak factory automation sales, but we forecast top-line growth of 4.3% in fiscal 2024 driven by a recovery in FA demand. Despite the positive postearnings share price reaction, we continue to believe that MEC’s shares are undervalued as the medium-term growth potential of its FA systems is underestimated due to near-term headwinds.