Muddy Waters Capital LLC (“Muddy Waters”) is short Nidec, and we value its shares at JPY 4,764. We view Nidec as a gigantic stock promotion. The company’s management, led by Mr. Shigenobu Nagamori, repeatedly give uber-bullish predictions about Nidec’s business, and then massively misses them. Nidec missed a three-year forward sales projection by 29%. The company missed its 2015 sales target of JPY 2,000 billion by 41%, and now tells investors that number is its 2020 target. Nidec missed a two-year projected overall operating profit target by 27%. Nidec’s track record with short, medium, and long-term projections in its Automotive product group seems even worse.
On top of the arbitrariness of Nidec’s projections, we calculate the company showed effectively no organic growth over the past four years, despite having projected its organic growth CAGR during this time would be 11.4%. Instead, we calculate that Nidec’s actual organic growth (ex-currency effects and M&A) CAGR from FY 2011 through FY 2015 was only 0.05%. The quality of Nidec’s earnings growth seems poor. We estimate that effective tax rate reductions have boosted Nidec’s reported EPS by 11.4% since FY 2013. Given Nidec’s meager top line organic growth, it is probably fair to say that the vast majority of the remainder of Nidec’s reported EPS growth has been due to currency effects and M&A.
Analysts and investors appear to have gone blind from staring at The Man Hotter Than the Sun. (This is a reference to Mr. Nagamori’s self-published comic book about himself.) Sell-side analysts heap praise on the company, and write about their expectations for future organic growth as though Nidec were a completely different company. At the same time, they remain oblivious to the incessantly missed predictions. As a result, Nidec’s sky high valuation implies a valuation for its non-HDD businesses close to that of Facebook, Inc., which is one of the strongest consumer brands in the world, generates 35%+ organic growth, and generally converts a much higher percentage of its operating cash flow to free cash flow than Nidec does.
Nidec’s failures to meet targets are made even worse by the highly aggressive accounting the company employs to boost reported profitability, and make the trend in its automotive business look more favorable than it really is. Nidec’s JPY 36 billion in write-offs seem unjustified, and could have been improper. According to the company, the write-offs boosted reported profit by JPY 10 billion to JPY 15 billion per year. Nidec has transferred businesses into the Automotive group in ways that misleadingly flatter the Automotive group’s results. Furthermore, we have interviewed four former employees who have attested to Nidec Automotive group salespeople in China stuffing the channels (thereby improperly boosting reported sales). Nidec’s auditor probably offers little safeguard against misleading accounts – in our opinion, Nidec’s auditor is to audit failures what Michael Jordan was to basketball.
Part of the myth underpinning Nidec’s valuation is a notion that it is a superior acquirer of businesses. We think Nidec’s acquisition strategy is more effective at masking weak organic growth than at creating value, and we see the extent to which it generates synergies as greatly overestimated. While Mr. Nagamori speaks publicly about buying companies such as Renesas Electronics Corp. (6723 JP) and Calsonic Kansei Corp. (7248 JP), he makes some highly questionable purchases, such as a recent acquisition of a small Romanian company from a convicted felon. Former employees of some of Nidec’s acquisition targets question the thoroughness of Nidec’s due diligence, and the notion that there were synergies with Nidec’s existing businesses. At the time Nidec announced it was acquiring Ansaldo Sistemi Industriali S.p.A., Mr. Nagamori brushed aside the rare analyst question about whether Nidec would be able to achieve its goal of generating a 10% operating profit margin in the business. The most recent financials we have for that entity show that its OP margin halved since around the time of acquisition to 2.8%. Nidec’s reasons for acquiring minority stakes in six formerly listed subsidiaries are unclear, but we note that Mr. Nagamori received JPY 29.5 billion in Nidec shares (at today’s share price) for his ownership of these companies.
Nidec in our view unduly promotes business opportunities with sex appeal, such as haptics (which led to a write-off), robots, drones, and LIDAR. These exciting products account for a tiny sliver of Nidec’s overall business, and in our view, have received an inordinately large amount of attention from investors. Nidec’s margin on sales of drone motors to Amazon.com (AMZN US) is likely to be significantly compressed once any scale is achieved.
We have real corporate governance concerns about Nidec. There are indications that management is able to override internal controls. Mr. Nagamori’s receipt of Nidec shares worth today approximately JPY 29.5 billion for his stakes in subsidiaries raises questions, as does the JPY 14.5 billion loan he received from the company, which was repaid a few months later by mostly selling his Nidec shares to the company. It is disconcerting that Nidec was unable to hold onto Bunsei Kure, while the company’s Chief Technology Officer, Mikio Katayama, was instrumental in running Sharp into the ground.
We value Nidec’s shares at less than half of the price – JPY 4,764. At the current price, the implied valuation ascribed to its non-HDD businesses is approximately 21.5x EV / EBITDA. (Facebook trades at 24.9x.) Given Nidec’s anemic organic growth, the seeming commoditization of many of its products, and the capital intensity of manufacturing, we can see no reason to justify a share price anywhere close to Nidec’s current valuation. Unfortunately, Nidec’s transparency has been decreasing over the years, and is poised to take a large step backward as the company plans to no longer file financial statements in the U.S. Unless Nidec resolves the U.S. filing and other transparency issues, we believe investors should exercise extreme caution when considering purchasing Nidec’s shares.
To download the full report (file size: 5 MB), click the “Download Report” button and agree to the Terms of Service to download the report.
The reports on this website have been prepared by Muddy Waters, LLC (“Muddy Waters Research”) and are for informational purposes only. Under no circumstances should any of these reports or any information herein be construed as investment advice, or as an offer to sell or the solicitation of an offer to buy any securities or other financial instruments.
Muddy Waters Research is an online research publication that produces due diligence-based reports on publicly traded securities. The reports contained herein are published by and the property of Muddy Waters Research, and this website is owned by Muddy Waters Research. The opinions, information and reports set forth herein are solely attributable to Muddy Waters Research and are not attributable to any Muddy Waters Related Person (defined below) (other than Muddy Waters Research).
You should assume that, as of the publication date of Muddy Waters Research’s reports and research, Muddy Waters Related Persons (possibly along with or through its members, partners, affiliates, employees, and/or consultants), Muddy Waters Related Persons’s clients and/or investors and/or their clients and/or investors have a position (long or short) in one or more of the securities of a Covered Issuer (and/or options, swaps, and other derivatives related to one or more of these securities), and therefore stand to realize significant gains in the event that the prices of either equity or debt securities of a Covered Issuer decline or appreciate. Muddy Waters Research and/or the Muddy Waters Related Persons intend to continue transacting in the securities of Covered Issuers for an indefinite period after an initial report on a Covered Person, and such person may be long, short, or neutral at any time hereafter regardless of their initial position and views as stated in the research report published by Muddy Waters Research. Muddy Waters Research will not update any report or information on its website to reflect changes in positions that may be held by a Muddy Waters Related Person.
This is not an offer to sell or a solicitation of an offer to buy any security. Neither Muddy Waters Research nor any Muddy Waters Related Person are offering, selling or buying any security to or from any person through this website or reports on this website. Muddy Waters Research is affiliated with Muddy Waters Capital LLC (“MWC”). MWC [is a registered investment adviser with the U.S. Securities and Exchange Commission and] is not registered as investment adviser in any other jurisdiction. MWC does not render investment advice to anyone unless it has an investment adviser-client relationship with that person evidenced in writing. You understand and agree that MWC does not have any investment advisory relationship with you or does not owe fiduciary duties to you. Giving investment advice requires knowledge of your financial situation, investment objectives, and risk tolerance, and MWC has no such knowledge about you.
If you are in the United Kingdom, you confirm that you are accessing research and materials as or on behalf of: (a) an investment professional falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “FPO”); or (b) high net worth entity falling within Article 49 of the FPO.
Muddy Waters Research’s research and reports express its opinions, which Muddy Waters Research has based upon generally available information, field research, inferences and deductions through Muddy Waters Research’s due diligence and analytical process. To the best of its ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources that Muddy Waters Research believe to be accurate and reliable, and who are not insiders or connected persons of the Covered Issuers or who may otherwise owe a fiduciary duty, duty of confidentiality or any other duty to the Covered Issuer (directly or indirectly). However, such information is presented “as is,” without warranty of any kind, whether express or implied. Muddy Waters Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Further, any report on this site contains a very large measure of analysis and opinion. All expressions of opinion are subject to change without notice, and Muddy Waters Research does not undertake to update or supplement any reports or any of the information, analysis and opinion contained in them.
In no event shall Muddy Waters Research or any Muddy Waters Related Persons be liable for any claims, losses, costs or damages of any kind, including direct, indirect, punitive, exemplary, incidental, special or, consequential damages, arising out of or in any way connected with any information on this website. This limitation of liability applies regardless of any negligence or gross negligence of Muddy Waters Research or any Muddy Waters Related Persons. You accept all risks in relying on the information on this website.