Japan bearing sales: Predictably poor in September 2012

by SR on November 12, 2012

Japan bearings, ratio of orders (booking) to sales (billings), x

Awful bearing orders, but already in price

The September 2012 orders for bearings were released last week. I’m not going to spend too much time on this because we have just had the results for the July-September quarter for the three major bearing companies, namely JTEKT, NSK and NTN. While there will be a time to buy these stocks, the bad news is likely to keep on coming for a little while yet. I’m looking for a good time to draw a line in the sand and buy NSK (or NTN for the brave) but it might yet be a little early. I said “in the price” above, but by that I meant that the downside may be limited from here. The question is how much upside there is over the next two quarters.

Bearings suppliers have reported Q2

All of the bearings suppliers fared poorly, although NTN easily takes the crown for worst figures for Q2 of the March 2013 financial year. As the chart below shows, margins have been hit hard. NTN is under great strain not only because of its exposure to Europe (typically 25% or so of revenues) but because it has relatively little exposure to Toyota, which is having a great year. Moreover, NTN’s auto bearing and parts (CVJs etc) business has been chronically low-margin for years and it seems unable to improve the situation.

NTN (6472) quarterly operating profit margin (%)

NSK is a slightly different kettle of fish. It is one of the world’s leading suppliers of electrically assisted power steering and this has no doubt supported the struggling industrial bearing business. As a result it has seen less margin compression than NTN. Furthermore, the graphic below shows that during the good times NSK is more profitable than either NTN (above) or JTEKT (below). NSK derives a bit less than 15% of its revenues from Europe, the smallest of the three major Japanese bearings suppliers.

NSK (6471) quarterly operating profit margin (%)

JTEKT is the last of the big three and like NTN has exposure to Europe, although at just over 15% it is nothing like as high. Like NSK, JTEKT is a supplier of electric power steering systems and is indeed the global No.1 with a share of around 50%. The proportion of JTEKT’s revenues drawn from the auto industry is high (about 80%), which is not surprising given that it is one of the core members of the Toyota group. As you can see, operating profit margins held up well in the July-September 2012 quarter of FY3/13 due largely to the contribution of the auto business.

JTEKT (6473) quarterly operating profit margin (%)

Back to those order figures

September 2012 bearing orders were terrible, as one would expect. Total orders came in at 47.2 billion yen, down 24.5% year-on-year and rose only 1.3% month-on-month. The order backlog fell again to 137.3 billion yen, now at its lowest level since September 2004 as the companies chew up their order book. Year-to-date (i.e. January to September 20012) orders have fallen by 4.6% compared to the same period in 2012. There’s not much more to say. The ratio of bearing orders to bearing sales (see chart at the top of this page) fell to 0.907x, the worst figure since this data begins in 1987 if you exclude the severest period of the global financial crisis (the ratio was below 0.9x for January to May 2009).

Japan bearings book-to-bill ratio, long term (x)

So the bearings book-to-bill ratio (BB ratio) is indicating severe economic distress, but I think the markets had already kind of noticed that. See how since the beginning of 2012 the three bearing suppliers have significantly underperformed TOPIX.

Japan bearing stocks, change in share price year-to-date (%)

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