TOKYO (Reuters) – The season for announcing financial results for domestic companies is in full swing. In addition to the current fiscal year’s performance outlook, the focus will be on management initiatives that are conscious of stock prices and cost of capital as requested by the TSE. Japanese stocks, which have been in a lull since reaching a high in March, are expected to be the catalyst for a return to higher stock prices. On the other hand, as prices still remain high, people are also wary of the risk of disappointment.
“The market is pricing in a significant increase in profits of around 8% for this fiscal year.As the market’s expectations are high, it is likely that it will be difficult to assess performance,” said Shingo Ide, chief stock strategist at Nissay Research Institute. .
Based on LSEG’s market forecast data, the average profit growth rate for the current period of 480 companies covered by three or more analysts with fiscal year-ends 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 fiscal 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 beginning of the fiscal year, and Fujiwara says, “The launch pad is likely to be lower than analysts expected.”
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 market view is not to take this at face value, but to see upside potential. Last year, despite the March Tankan showing a plan for a 3.1% decline, stocks rose from April to June.
However, “the position of stock prices is different between last year and this year,” points out Atsushi Kitazawa, deputy general manager of the investment information group at Miki Securities’ product department. Last year, the price-to-earnings ratio (PER) was around 14 times, so it didn’t seem overvalued and had room for growth. Although the current PER has fallen from 17 times at one point, it is in the mid-16 range, near the upper limit of the range over the past five years excluding abnormal values due to the coronavirus pandemic, and “there is little room to factor in an upside” (Kitazawa). There is also a view.
<�“Reaction increase” stands out as a driving force>
Among the top companies in terms of profit growth rates by sector, there are many cases in which the increase is a reactionary increase from the previous year’s decline in profit.
Electrical equipment, including semiconductor-related products, which has been the driving force behind stock prices since the beginning of the year, ranks eighth among sectors with a 17% profit growth rate. This is a part of the industry where profits were expected to decline in the previous fiscal year, and a rebound is expected to increase in the current fiscal year. Kazuyoshi Saito, senior analyst at Iwai Cosmo Securities, predicts that “Memory investment will pick up 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 currently weak, Mr. Saito predicts that if major semiconductor stocks in Japan and the U.S. confirm solid performance and growth potential in their financial results, “stock prices will rebound to some extent.”
Other industries with the highest profit growth rates include textile products, which increased 31%, chemicals which increased 30%, and non-ferrous metals which increased 26%. Regarding the chemical industry, Shigeki Okazaki, a research analyst at Nomura Securities, said, “In the previous fiscal year, there was an impact from customers such as the semiconductor industry, whose production was lower than final demand, but this fiscal year, as inventory adjustments have finished, shipments are in line with actual demand. It is expected that he will return.”
Growth in transport equipment manufactured by automakers and other manufacturers is likely to slow down 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 was tight, and the sales margin per unit was at its maximum,” said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Lab.
As recovery production 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, he believes that there is no need to take a pessimistic view, noting that the positive impact of exchange rates will be significant.
Even if earnings growth is in line with market expectations, it is unlikely that the Nikkei Stock Average will 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. In order for the price to rise to a high level again, the P/E ratio will need to rise even further due to renewed speculation about US interest rate cuts, the generative AI (artificial intelligence) boom, foreign investors buying Japanese stocks, and domestic wage inflation.
In this context, what is attracting attention as well as the business outlook is how the company is responding to the TSE’s request for management to be conscious of stock prices and 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.
As of the end of March, 65% of companies had disclosed information or were considering it, compared with 65% for Prime and 26% for Standard. “About half of the companies have not yet disclosed their information.It has been a year since the TSE request, so I think many companies will be disclosing their information this time,” said Mr. Ide of the Nissay Research Institute. Mr. Kitazawa of Miki Securities believes that there is hope for companies that are “under consideration” in their latest financial results. “In particular, companies with a price-to-book ratio (PBR) of less than 1 times are attracting a lot of attention,” Kitazawa said.
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 has also pointed out that “I think stocks will be selected based on specific content, feasibility, sustainability, etc.” (Shinkin AM’s Fujiwara).
(Noriyuki Hirata Edited by Hiroshi Hashimoto)
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Tags: Focus Corporate financial results catalyst resumption Japanese stock prices harsh scrutiny overvalue Reuters
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