July 21, 2017 / 9:15 AM / 2 years ago

REFILE-Yaskawa's earnings signal bullish short-term path for Nikkei

(Refiles to fix typographical error in first paragraph)

* Market looks to Yaskawa as barometer for earnings - fund manager

* 70 pct chance Nikkei will rise next week - study

By Ayai Tomisawa

TOKYO, July 21 (Reuters) - Factory automation equipment maker Yaskawa Electric Corp’s jump in share price points to a rise in Japanese stocks next week, according to a study suggesting the firm’s share price has a short-term correlation to the Nikkei index.

Yaskawa, which makes AC servo motors, a key component used in machine tools, is among the first to announce quarterly earnings. If it surprises with positive results, that sets the tone for other Japanese companies, market players said.

The firm’s stock jumped more than 15 percent to a record high of 2,938 yen on Friday, before ending 10 percent higher as its robust profit forecast attracted buyers.

Factory automation equipment demand has been strong due to rising demand in China’s smartphone market, prompting investors to speculate that other machine tool makers will also benefit from strong Chinese capital expenditure.

While the Nikkei share average edged down as a firmer yen soured the mood on Friday, machine tool makers sharply outperformed. SMC Corp climbed 3.3 percent, Keyence Corp 1.2 percent, Nidec Corp 1.1 percent, Fanuc Corp 2.1 percent and Mitsubishi Electric Corp 4.6 percent.

“A lot of investors look at Yaskawa’s results as a compass to earnings that could potentially come out from Fanuc and other industrial robotics as well as other machine tool makers,” said Kei Okamura, assistant investment manager at Aberdeen Investment Management.

Meanwhile, a brokerage study showed that Yaskawa’s influence was not limited to one sector but could affect the broader market, though its impact might be short-lived - mostly at the early stage of the quarterly earnings season.

“History shows that when Yaskawa’s share price rises after it releases earnings, the Nikkei’s level five days later is at a higher level than the day before Yaskawa released its earnings,” said Takuya Takahashi, a market strategist at Daiwa Securities.

Takahashi has tracked a correlation between Yaskawa’s earnings and the Nikkei’s performance during quarterly earnings seasons since 2004.

His study showed that of a total of 52 quarterly earnings in the past 13 years, Yaskawa’s share price rose 27 times the next day, which lifted the Nikkei to a higher level five days later, for 19 times. The math suggests there is a 70 percent chance of the Nikkei being at a higher level at the end of next week.

Yaskawa, whose business year ends in February, reported its operating profit jumped 240 percent to 13.2 billion yen ($118.12 million) for the April-June quarter, and raised its profit forecast for the current year. It now expects an operating profit of 45.5 billion yen, up from a previously forecast 37 billion yen.

But some market participants warned of Yaskawa’s high valuations and a potential correction after earnings momentum is priced in.

“Its April-June quarter was way ahead of market expectations. But such an uptrend cannot last forever,” said Makoto Kikuchi, chief executive of Myojo Asset Management, who pointed to Yaskawa’s higher valuation.

“There is a recent trend in which investors overlook companies’ valuations and bet on their earnings momentum. Who knows when such a trend will see a turnaround.”

$1 = 111.7500 yen Editing by Jacqueline Wong

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