Japan bearing orders: backlog down to 2005 levels

by SR on August 9, 2012

Japan bearings order backlog to June 2012 (billion yen)

Everything bad, except autos

Conclusion: overseas orders weak, everything about from autos soft, backlog sinking and the book-to-bill ratio back down to a perilously low 0.94x. Presumably is negative for other vendors such as SKF and Timken, particularly since they have made a big deal out of reducing exposure to the auto market.

To recap, total bearing orders for June 2012 came in at -15.8% YoY to 54.03 billion yen (+1.1% MoM), with auto orders +7.6% YoY to 23.08 billion. Year-to-date (January-June) total orders have risen 4.1% YoY only due to auto orders having expanded by 36.9% YoY. The backlog fell to 149.5 billion yen, the lowest level since March 2005. All in all, this set of numbers, released this morning by ESRI, was not good.

It wasn’t good, but nor was it news. It simply confirmed the continuation of an order trend that has been in motion for half a year. As I mentioned in an earlier post today, I am starting to feel that we might be getting close to the bottom for Japan machinery stocks, or something like the bottom. What else can go wrong? Europe apparently imploding – check, got that. China comatose – check. US recovery so weak as to be invisible to the naked eye – check. Q1 results for machinery stocks generally poor, reflecting the above – check. What else can go wrong?

Distrust of machinery

Share price performance of auto parts and bearing stocks

Meanwhile, the market has certainly not given machinery and machinery-related stocks the benefit of the doubt. The chart above shows the change in the share price from the end of 2011 to 9 August for a handful of stocks: autos, auto parts, machinery-tinged auto parts and a couple of machinery stocks. As you can see, the best performers have been Toyota and Denso, those two being the auto OEM with the most momentum this year and its main supplier, respectively. They have both risen by 25% year-to-date. Note the gap between those two and Toyota Industries, which is up only 7.8% YoY. I ascribe that to Toyota Industries’ exposure to the quasi-industrial forklift truck market, in which it is the largest global player. With machinery and industrial equipment demand this soft, you probably want to avoid forklifts as well.

Next comes a machinery stock, hydraulic equipment supplier SMC, which at least is up for the year. Then you have NSK – a major supplier of industrial bearings – and JTEKT. These two companies stocks both supply electric power steering, which is a key system technology for modern autos. JTEKT has a global share of about 50% and NSK claims a share of around 15%. Despite this their exposure to bearings and, in the case of JTEKT, their exposure to Europe has weighed heavily on them compared to “pure” auto parts stocks.

In between JTEKT and NSK is Komatsu, down a few percent year-to-date due largely to fears about the Chinese construction market, an important source of earnings for this global leader in construction equipment. Finally we have NTN. This is a difficult company to cover. They tend to over-optimistic and miss guidance. IR is helpful but on its own terms (they discourage phone calls and you have to visit them Osaka). The company has a consistent problem with low margins in the auto business. They derive close to 25% of their profits from Europe. This is all well-understood and the share price shows that.

What would I buy here? Nothing just yet, I’m just looking at machinery stocks more carefully. A couple of points to keep in mind for those wanting to add positions in machinery:

  1. Choose your theme. Japanese stocks tend to have a certain thematic colour associated with them, such as China for Komatsu or electronics or semiconductor capex for Keyence. Decide what you want and find the stock to match.
  2. Don’t be too clever. Beyond some simple exposure targeting, there’s no need to go for niche stocks at this stage. Grab something large and liquid so it all goes wrong at least you can get out. Typically you should go for small caps later when the large caps have already run.

A quantum of solace

Going back to the orders, it’s not all bad. By which I mean, it could be worse. Order inflows in 2012 – as shown by the red line in the chart below – are still some way above the low levels recorded in 2009 during the global financial crisis (the yellow line in the chart below). While these are certainly worrying markets, it seems that the consensus on the major economies is that they’re mostly in better shape than they were at the end of 2008.

Japan bearing orders by year (billion yen)

As for the book-to-bill ratio, the June number was the worst June since 1998 and 0.94x is the level when red lights should start flashing, if they aren’t flashing already. As it happens those lights have been flashing for a while so again, it’s not new news. We should continue to monitor news on orders and demand, and hopefully orders will begin to pick up in the autumn.

Japan bearing book-to-bill ratio (x)

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