Ben Beneche of Pictet Asset Management presented his in-depth investment thesis on FANUC (Japan: 6954) at Wide-Moat Investing Summit 2020.

Thesis summary:

FANUC specializes in automation. Since becoming independent in 1972, the business has grown to become a market leader in three important robotics verticals: numerical controllers (29% sales), industrial robots (37%), and machine tools (16%). Within each of these businesses, FANUC has best-in-class contribution margins, enabled by a combination of technological, cultural, and cost-based competitive advantages.

The favorable underlying economics have been masked by significant investment in new capacity and R&D, which has contributed to EBIT margins declining from 40.8% in 2015 to 17.4% last year. As capex begins to normalize and plant utilization improves from the current sub-30% level (estimated), the business appears poised for significant improvement in both sales and margins, with steady-state ROCE of 25.2%.

R&D spending has largely focused on an edge-based software stack called FIELD, which offers tools such as predictive maintenance and zero-downtime applications to clients. Although still in the early stages, the ROI offered to clients appears high, with a bull case scenario of FIELD stand-alone potentially worth 140% of the company’s recent market cap. Even assuming no value here, the shares recently traded at 17x Ben’s normalized FCF estimate, a reasonable margin of safety for a business of this quality.

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About the instructor:

Ben Beneche joined Pictet Asset Management in 2008 and is a Senior Investment Manager and Co-Lead of the International Equity strategy which he began managing in 2012. He has a specific focus on Japanese and Pacific ex Japan Equities. Ben graduated from York University with a first-class honours degree in Economics and Economic History. He is also a Chartered Financial Analyst (CFA) charterholder.

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