TDK 1Q beats expectations; Goldman Sachs raises target price to ¥4,900 and reaffirms Buy

Overview

This report is Goldman Sachs' 1Q earnings review of TDK (6762.T). It notes that TDK's 1Q operating profit exceeded expectations and that the company maintained its full-year operating profit guidance of ¥295bn, while the outlook for all businesses in 2Q and beyond is trending upward. Goldman Sachs believes the company is shifting from a battery-centered earnings structure toward a more balanced structure in which profitability is strengthening across all businesses.

Core views

Goldman Sachs reaffirmed its Buy rating on TDK and raised its 12-month target price from ¥4,600 to ¥4,900. Key factors include: passive components supported by automobile and AI/data center demand; the sensor business driven by an automobile recovery and smartphone seasonality; magnetic applications supported by HDD heads price increases and improved front-end capacity utilization; and energy applications supported by shipments of small rechargeable batteries and a higher mix of high-value-added products.

Analysis framework

The report analyzes 1Q actual results, information from the company's earnings briefing, segment-level 2Q revenue growth guidance, earnings forecast revisions, and the valuation framework. Goldman Sachs raised its FY3/27-FY3/29 operating profit forecasts and calculated the target price using a premium of FY3/29E EV/GCI relative to CROCI/WACC and the industry's EV/DACF multiple.

Methodology notes

• Valuation methodsEV/GCI vs. CROCI/WACC

  Relative valuation based on return on capital and cost of capital

  Goldman Sachs uses FY3/29E EV/GCI relative to CROCI/WACC as the basis for its target price and applies a 10% premium to the industry average EV/DACF multiple of 10X, implying FY3/28E P/E of 27X.

• Factor AnalysisGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite factors

  The Goldman Sachs Factor Profile provides investment context for the stock relative to the market and industry peers through growth, financial returns, valuation multiples, and composite percentiles.

• Event AnalysisEarnings Review

  Revising earnings forecasts based on quarterly results and management outlook

  This report uses 1Q operating profit, segment-level 2Q revenue growth guidance, and management commentary on demand and profitability as the main basis for raising earnings forecasts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TDK (6762.T)

  Core covered security

  Strengths

  1Q operating profit exceeded expectations; all four major businesses improved; AI/data center, automobile, HDD, and high-value-added battery demand provide diversified drivers; net cash position is expected to improve.

  Weaknesses

  Some businesses remain exposed to the smartphone cycle, material costs, foreign exchange, and fluctuations in HDD demand.

  Comparison

  Compared with a single battery-driven structure, Goldman Sachs believes TDK is shifting toward a more balanced model in which profitability strengthens across all businesses; the valuation methodology applies a 10% premium to the industry average EV/DACF multiple of 10X.

  Risks

  Declining smartphone production, rising input costs, and yen appreciation.

• TDK ADR

  Related security

  Strengths

  An asset related to the same company as TDK common stock; the report discloses a price of $45.24.

  Weaknesses

  The ADR price may also be affected by foreign exchange and cross-market liquidity.

  Comparison

  The report's primary target price and rating apply to 6762.T, while the ADR appears as a related disclosed security.

  Risks

  Foreign exchange volatility, underlying stock volatility, and company fundamental risks.

Key data

• RatingBuyGoldman Sachs reaffirmed its Buy rating.
• 12-month target price¥4,900Raised from ¥4,600 previously.
• Current price¥3,023Price stated in the report.
• Expected upside62.1%Based on the target price and current price.
• 1Q operating profit¥86.3bnAbove Goldman Sachs' previous estimate of ¥68.8bn.
• Company full-year operating profit guidance¥295bnThe company maintained its full-year guidance, assuming an exchange rate of ¥150/USD.
• FY3/27E operating profit¥358.0bnGoldman Sachs' new forecast; old forecast was ¥322.0bn.
• FY3/28E operating profit¥398.0bnGoldman Sachs' new forecast; old forecast was ¥363.5bn.
• FY3/29E operating profit¥440.0bnGoldman Sachs' new forecast; old forecast was ¥400.0bn.
• FY3/27-FY3/29 operating profit forecast increases11% / 9% / 10%Based on 1Q results and the company's briefing.
• Market capitalization¥5.7tr / $36.0bnKey Data stated in the report.
• Enterprise value¥5.3tr / $33.5bnKey Data stated in the report.

Impact & implications

The report's implications for TDK's share price are positive: earnings upgrades, a higher target price, and 62.1% expected upside together strengthen the investment case. If AI/data center, automobile, HDD, and high-value-added battery demand continues to materialize, TDK's earnings drivers will become more balanced, making a valuation premium more readily accepted by the market.

Risks

• Declining smartphone production.
• Rising input costs.
• Yen appreciation.
• AI/data center demand or HDD heads demand falling short of expectations.
• The mix of high-value-added battery products increasing less than expected.

What to watch

• Whether 2Q sequential revenue growth in each business reaches the company's guidance.
• The contribution of HDD heads price increases and improved front-end process utilization to earnings.
• The sustainability of AI/data center-related demand in passive components and inductors.
• Small rechargeable battery shipment volumes and the mix of high-value-added products.
• Whether FY3/27-FY3/29 earnings forecasts are raised further.
• Changes in the yen exchange rate and material costs.