Robotics and Tools Manufacturer Fanuc Should Be Bought at a Bottom

Fanuc (FANUY) is the premier manufacturer of robotics and machine tools in the world. The company has been around since 1972 and has shown awesome revenue growth. The challenge is that the company and stock are very cyclical. The trick is to get in at the bottom, which it is a way from reaching. The company has 205.9 million shares and trades at a market cap of ¥384 trillion ($34.6 billion). Based on last year’s number, the shares trade at a price to earnings ratio of 19.7 and have a dividend yield of 4.1%. This was a special dividend and will be less in future years. The dividend would be about ¥180 in normal times, so the yield would be 1%. Sales were ¥381 trillion ($34 billion) in 2006, jumped up to ¥468 trillion ($42 billion) in 2008, fell to ¥388 trillion ($35 billion) in 2009, crashed to ¥253 trillion ($22.8 billion) in 2010, then skyrocketed to ¥446 trillion ($40 billion) in 2011 and hit a high of ¥730 trillion ($66 billion) last year. It takes ¥111 to buy one dollar. No doubt that this is not your traditional company that increases revenues 4% every year. Sales are all over the place and very unpredictable. On page 8 of last year’s annual report, a bar chart shows sales going back to 1972. Basically, sales rise for three to five years, and then fall for the same amount of time before the process starts over. I’ve never seen a company with this pattern. As of the most recent release, cash was ¥877 billion ($7.9 billion) and accounts receivable were ¥97 billion ($874 million). Accounts payable were ¥30 billion ($270 million) and there is no debt to speak of. The company has an amazing balance sheet. Free cash flow was ¥201.5 billion ($1.84 billion) in FY 2015. The three divisions are FA, Robot and Robomachine. FA makes motors and lasers and the computers to run these devices. Robot makes robotic arms used in manufacturing. Robomachine manufactures drills, cutting devices and other sophisticated machine shop devices. In all, Fanuc is a high end manufacturer of machine shop tools. These are the tools used to make any product such as drills, saws and lathes. These tools have been around for thousands of years but are now computer controlled. Like many Japanese companies, the annual report is only a little over 30 pages and does not divulge much information. Daniel Loeb of Third Point got involved and “encouraged” the company to increase its dividend. Like many Japanese companies, management is aloof to shareholder needs. Fanuc has created an investor relations department (according to the Wall Street Journal). In addition to the special dividend, Fanuc is also buying back many of its shares and cancelling out Treasury shares. A great article on Fanuc can be found at The Economist, where management allowed a journalist a rare glimpse of operations. The company’s programmers have developed a process called deep reinforcement learning. This process allows a robotic arm to train itself on how to accomplish a task. An example was given of how a robot was able to pick pieces out of a bin. It learned an effective process overnight. The stock has been on a roar over the last few years, as the company focuses on its products in the smartphone business. If history repeats itself, Fanuc is at a high and will probably take a few years off. No doubt, it is tied to manufacturing, which is tied to the global economy. Fanuc is different from your average tech company in that there always has and always will be a need for machine tools. Fanuc just happens to be the best at it. Many tech companies come and go, but the odds are slim that another outfit comes along and knocks them off their perch. What will affect Fanuc is a weak economy or a drop in the Nikkei. If you can find a bottom, Fanuc would be an excellent long-term holding.