Murata Manufacturing ADR (OTCMKTS:MRAAY), the world’s largest producer of multi-layer ceramic chips (MLCCs) with more than 40% market share, has a very bright future, according to a bullish thesis on Macro-Ops. Murata is a Japan-based manufacturer of electronic components that cranks out over 150 billion MLCC pieces per-month, versus 100 billion pieces per-month produced by closest peer Samsung Electric.
MLCCs, the company’s main revenue source, are expected to see a demand explosion from two sources: electric vehicles and 5G telecommunications, according to thesis by Brandon Beylo. MLCCs are inexpensive, extremely reliable and can withstand high voltages, frequencies and temperatures. These characteristics make them the go-to capacitor for consumer electronics, 5G telecom and EV components. The required number of automotive MLCCs jumped from 3,000 units in 2012 to 8,000 units in 2018.
Murata predicts that the MLCC usage in smartphones in 2024 will be 1.5 times more than that in 2019. Each 5G smartphone is estimated to need more than 1000 units MLCC in the future. The Global and China Multi-Layer Ceramic Capacitor Industry Report (2019 to 2025) expects MLCC supply to reach 6.1T/year by 2025.
It’s clear MLCCs will be vastly more important in five years than they are now. And we’re going to need a heck of a lot more of ‘em. In turn, MLCC producers, most notably the world’s largest, should be worth significantly more five years from now, according to Beylo.
Murata says it focuses on products that their competitors don’t. The company’s future success mainly depends on its ability to capture the growing demand for MLCCs in the automotive and communications markets via EV and 5G. Murata’s MLCCs will meet heightened demands as powertrains move to EV and autonomous driving levels increase. The company expects Mild HEV (Hybrid/Electric) powertrains to reach ~15-20M units by 2024. At the same time, Autonomous Driving levels should increase from zero to a majority at Level 1 and Level 2.
Meanwhile, the company’s financial results are impressively consistent despite operating in a cyclical industry. Since 2004, the company’s averaged 35%+ gross margins, 12-18% operating margins and reported only one losing year that was 2008. During the time, Murata has grown revenue from $4 billion to $14 billion, operating income from $539 million to $2.24 billion and FCF from ~$400 million to ~$900 million.
Risks to Murata’s future success include: growing competition from Chinese companies; increased demand from alternative capacitors like aluminum polymer and tantalum due to high lead times in MLCC supply; inability to correctly anticipate changing customer needs/landscape resulting in poor R&D investment; losses in the company’s lithium-ion battery business; and economic recession or COVID-related scare that delays demand for 5G and EV/Autonomous vehicle investment.
The company’s current stock price assumes a few things on an EBITDA exit basis over the next five years, including an average revenue growth of 5%; a 37% average gross margin; a 16% average EBIT margin; and a 25% average EBITDA margin.
These assumptions get us $18 billion in revenues, $4.74 billion in EBITDA and $2.24 billion in after-tax operating earnings. A 15x 2025 EBITDA multiple at a 10% discount rate gets us a little over $43 billion in shareholder value.
If the future demand from EV/Autonomous Driving and 5G are real and materialize, the above revenue growth rate is too low. What happens if we assume Murata grows 13%/year for the next five years?
Murata shares have been performing well. Over the past 12 months, the company’s stock price has jumped more than 28%, while the stock is up more than 11% so far this year.
Disclosure: None. This article is originally published at Insider Monkey.
