MONDAY, SEPTEMBER 25, 2006
Tiny Motors, Big Ambition
By LESLIE P. NORTON
THE HARD DRIVE OFFICIALLY MARKS ITS 50TH birthday this month amid premature reports of its demise, and Shigenobu Nagamori is celebrating.
Nagamori founded and pilots Nidec (ticker: NJ), which dominates the market for motors powering hard drives, particularly the tiniest, found in iPods and other hand-held gizmos, and the shutters in your digital camera.
Under his leadership, Kyoto-based Nidec has become Japan's fifth-largest electronics company, sporting a market value of $10.4 billion. And if Nagamori, a puckish 62-year-old, has his way, that market cap will more than double in the next few years as Nidec moves decisively into midsized motors and electronics for automobiles, and snaps up rivals and suppliers.
For the year ending March, Nidec expects to report operating income of 65 billion yen ($560 million), and net earnings of ¥277 a share, on sales of ¥580 billion. That compares with operating profit of ¥53.4 billion, or ¥285 a share after taxes, on sales of ¥537 billion in fiscal 2006. Profit margins are expanding nicely, too. Nidec says operating margins will clock in at 11.2% this year, up from 10% a year ago.
Nagamori thinks sales will zoom to ¥1 trillion in 2010. What's the right market cap to put on that kind of figure? "About two-and-a-half to three trillion yen," he mused in a recent interview in New York.
At ¥8,390 a share last week, Nidec had a market value of ¥1.2 trillion, and sold for a hefty multiple of 30 times earnings. That gives some investors pause. "The upper-20 range is close to fair value," says Greg Stanek, a portfolio manager at Clay Finlay, who has reduced his Nidec position.
But don't count Nidec out. Since Barron's first wrote about the company more than two years ago ("Nidec's Niche," March 1, 2004), the shares have shot up as the company keeps beating forecasts. Nagamori controls 14% of the stock.
How does the boss get to a trillion yen in sales?
Among other things, that would mean big gains in sales in the non-motor divisions. Motors account for nearly 60% of Nidec's sales, with machinery, electrical and auto components and a tiny segment including auto parts chipping in the rest. Nidec wants to boost sales of auto-related products to ¥100 billion, or 10% of total sales, from just above 5% today. Nagamori also wants to nearly triple sales of electronic-power-steering motors, to ¥12 billion.
The appliance market also looks promising; Nidec developed a fan motor for a room deodorizer that operates on such a low current it can run for two months on a pair of AA batteries.
Or, take air conditioners. "Can you hear this conversation?" Nagamori asks, suggesting we can because "this hotel has Japanese motors for its air conditioners."
Air conditioners now account for 4% of sales. "Last week in Boston, my hotel air conditioner was so loud, I couldn't sleep," he says. "Finally, I lulled myself to sleep by thinking of the business opportunity!"
Key to Nagamori's strategy, however, is continued strong growth for the hard-drive motor business, where demand is growing 15%-plus a year, for both larger drives and the tiny hard drives powered by small precision motors.
Last week, Nidec officially opened the world's largest hard-drive motor factory in Thailand, where it also has other operations. A company spokesman says that despite the week's military coup, business is operating as usual. The company also has boosted capacity in facilities in China and the Philippines; it is building capacity in Vietnam, and increasing component production.
"Nagamori is passionate and persuasive on the brushless motor," says Warren Yeh, who oversees Adapa Partners, a New York hedge fund that invests in Asian shares. Indeed, Nidec dominates the market. Brushless motors use chips, not brushes, to switch current and control rotation. They're noiseless, and more durable and precise than conventional motors.
As personal computers, TVs and other gadgets download bigger files requiring greater storage, demand for more powerful hard drives, and motors to power them, is rising. A hard drive with storage capacity of 30 gigabytes might cost $70, versus as much as $570 for flash memory.
In the next few years, Nagamori wants to add ¥150 billion in sales by acquiring competitors and suppliers, both at home and overseas. Since founding Nidec in 1973 -- the name stands for Nippon Electric Indus- trial -- Nagamori has taken over 23 companies. Recently he hired away several senior investment bankers to work in-house, searching for takeover opportunities. One reason: "I already have a list of 30 companies I want to buy, I don't need [outside firms] to tell me."
Too many securities firms are setting up private-equity units that also are looking to buy companies, Nagamori grouses. Last year, he lost three takeover candidates this way. "They are competing with me!" he exclaims.
Moreover, commissions make up 1% to 5% of acquisition costs. His internal group can halve that cost, and get deals to break even more quickly.
Private-equity funds are paying so much for companies that he predicts high failure rates. "There will be plenty of busted deals to buy" in the next two to three years, he says. Expect some acquisitions soon -- although Nidec probably isn't interested in rivals Mabuchi Motor (6592 JP) and Johnson Electric (0179 HK), which specialize in brush motors. Another mooted target is chip- maker Rohm (696 3 JP), a major supplier.
Rohm's market cap is so large that a deal is unlikely, Nidec says.
This year, Nidec's shares are off 16%, while Japan's benchmark Nikkei 225 index is down only 3%. Much of the discrepancy owes to concerns about the tech cycle, slowing demand and possible margin compression. That's starting to make Nidec more attractive, particularly now that the company's raw-material prices probably have peaked.
Says Greg Jones, proprietor of Jadeite Capital and a Nidec fan: "This isn't a cheap stock, but it should be a core stock. Visibility is high for 15% to 20% growth going forward. You pay such a high multiple [because] Nagamori has the ability -- and a history of making acquisitions -- to enhance that growth rate by a couple of percentage points. The combination of having a track record and being on the side of shareholders is a strong one."
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