Horiba is best known as the world's leading supplier of automobile emission measurement systems (its equipment was used by the researchers who exposed Volkswagen's emission test cheating scandal), but its profits are primarily geared to the semiconductor cycle. In FY Dec-16, automotive test equipment accounted for 37% of the company's sales and 19% of its operating profit, while semiconductor equipment accounted for 23% of sales and 52% of operating profit. Semiconductor equipment sales and profits are also more volatile than those of automotive test equipment. The company's other products - process & environmental, medical and scientific equipment - generate less profit and less gearing.

Horiba's share price has risen by 65% over the past year to a new high of ¥6,570 - presumably on expectations for a recovery from last year's declines in sales and profits, supported by strong semiconductor capital spending - but this has lifted valuations to the top of their recent historical ranges. On top of that, the sales and operating profit growth rates of the company's semiconductor equipment division dropped to 9.8% and 2.6% in FY Dec-16 (from 22.2% and 46.1% the previous year) and management is guiding for increases of just 5.6% and 3.3% this year (less than the 8.1% and 4.4% they are forecasting for the company as a whole). Even if guidance is somewhat conservative, this is hardly an argument to buy into peak valuations, particularly as the approaching top of the semiconductor investment cycle points to another decline in earnings within the next two years. We would sell into strength and recommend looking at laggards in the sector instead.

As Pelham Smithers pointed out in his recent report - Japanese Semiconductor-Related Stocks - Leaders & Laggards as We Go Deep Into the IC Cycle (25 Apr 2017) - "TEL’s performance in the previous cycle is a warning that often you need to take money off the stock market table before IC firms take money off the investment cycle." As alternatives, Pelham suggests looking at JSR, Fujimi and Shinko Electric.

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Horiba (6856 JP): IC Cycle Peak Discounted

Horiba is best known as the world's leading supplier of automobile emission measurement systems (its equipment was used by the researchers who...

Scott Foster

Japanese Semiconductor-Related Stocks - Leaders & Laggards as We Go Deep Into the IC Cycle

If you go from the peak of the 1980~82 semiconductor cycle (ie the one that gave us the Commodore 64, the IBM PC [and technically the Apple III])...

Pelham Smithers Associates