Japan bearing sales and orders: an average month

by SR on May 16, 2012

Latest data suggests auto parts better place to be than bearings

Japan bearing orders, historical seasonality for the month of March

  • Those bearing results in a nutshell. The chart above shows the month-on-month change in total bearing orders for the month of March for the past two decades. As you can see, there is a strong tendency for March orders to rise relative to orders in February. March 2012 orders rose 8.3% month-on-month (exactly in line with the median MoM change for March since the year 2000) and 21.7% year-on-year to Y62.6 billion. So, literally an average month. Of course the year-on-year change looks impressive, but that is a consequence of the low base for comparison caused by the disruption to output that followed the Tohoku earthquake of March 2011.

(Related stocks: JTEKT; NSK; NTN; Minebea Nachi-Fujikoshi; SKF; Timken; Komatsu; Hitachi Construction Machinery; Sany Heavy.)
Japan total bearing orders year-to-date in billions of yen

  • Bearings doing better than machinery as a whole. I have already commented on the Japan machinery orders for March 2012 that were announced this morning. Seasonally adjusted orders fell slightly compared to the previous month and overseas orders declined sharply. I made the point that total machinery orders so far in 2012 on a cumulative (running total) basis are close to the levels of 2009-2011, whereas auto production for Toyota is already ahead not only of 2009-2011 levels but also exceeds 2008 levels. In other words, auto parts look more interesting than machinery-related stocks. As the chart directly above shows, bearings have done a little better than total machinery orders, which is understandable given that bearing orders come to about Y60bn per month whereas total machinery orders come to more than Y2 trillion per month. It’s just easier to move the needle of the bearings market. Bearings have also been helped by the exposure to auto bearing demand, which I estimate accounts for more than 40% of the total bookings for bearings at Japanese bearing suppliers.

Japan total bearing sales and orders in billions of yen

  • No change in the book-to-bill. As I do every month, I have put out the ratio of bearing orders to bearing sales – the ‘book-to-bill’ ratio. Generally we want to see something above unity i.e. over 1x. We didn’t get that, but we didn’t get any further deterioration in the ratio, which has remained at 0.98x for four consecutive months. Meanwhile the order backlog fell further to Y156.5 billion, a 0.7% MoM decline and the fifth consecutive sequential fall in the backlog.

Japan bearings book-to-bill ratio

Japan bearing order backlog in billion yen

  • Bearing stocks’ recent results were so-so. To summarise, the “pure” auto parts suppliers have done a better job of improving operating margins than the bearing companies. It is difficult to quantify this on a quarterly basis because different companies have different seasonal trends. Nevertheless, Aisin Seiki posted a record operating profit margin in the most recent quarter and although Denso and Toyota Industries are not back at peak levels, neither are they far off. By contrast, the three bearings suppliers are languishing some way off the peak. The following six charts, one for each of six companies, show this. My interpretation is that demand for industrial bearings (which is driven by capex) has not recovered since the global financial crisis of 2008-2009 as strongly as the auto market (which is driven by personal consumption).

    Denso posted an operating profit margin in January to March 2012 quarter of 8.4%, equivalent to 0.78x the peak of 10.7%.Denso quarterly operating profit margin (%)

Aisin Seiki posted an operating profit margin in January to March 2012 quarter of 8.5%, topping the previous record of 8.1%.

Aisin Seiki quarterly operating profit margin (%)

Toyota Industries posted an operating profit margin in January to March 2012 quarter of 5.2%, equivalent to 0.91x the peak of 5.7%.

Toyota Industries quarterly operating profit margin (%)

NSK posted an operating profit margin in January to March 2012 quarter of 5.7%, equivalent to 0.59x the peak of 9.6%.
NSK quarterly operating profit margin (%)

NTN posted an operating profit margin in January to March 2012 quarter of 4.5%, equivalent to 0.45x the peak of 10%.

NTN quarterly operating profit margin (%)

JTEKT posted an operating profit margin in January to March 2012 quarter of 4.5%, equivalent to 0.63x the peak of 7.2%.

JTEKT quarterly operating profit margin (%)

Make no mistake, these bearing companies will also benefit from the continuing recovery in Japanese auto production. This is especially so for JTEKT, which derives most of its profit from the auto steering business rather than the bearings business, but if auto production is what you’re aiming at, there are better ways to get exposure.

  • This is what we need to see before these stocks become buys First, let all the bad news come out. This is a nervous market and we can’t expect sustained performance from bearing stocks while the Japan FTC investigation is hanging over their heads. This affects NSK, NTN and to a lesser extent JTEKT. Second, NTN’s auto bearings business has been perniciously low-margin and they need to do something about that. Third, Europe needs to stop getting any worse, which could take time.
  • An accelerated restructuring for JTEKT? JTEKT in particular has loss-making operations in Western Europe as a result of acquiring Timken’s needle bearing business. Previously I had expected JTEKT to announce a restructuring of the European business but not before 2014 or 2015. With much of European mired in recession, I now think there’s a chance that JTEKT’s management will look at their rising losses in Europe, decide to bite the bullet earlier and announce something before the end of FY3/13. My guess is that most of the Western European production facilities will be closed and moved to Eastern Europe, to Hungary and/or the Czech Republic. That suggests some extraordinary losses related to the restructuring in FY3/13 or JTEKT. Still, the announcement would probably indicate that it’s time to look at buying JTEKT. NSK would be something to consider after the cartel issue is resolved. As for NTN, candidly speaking, I still struggle to find the attraction in the company and I would avoid for now.

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