NEC Corporation (6701: JP) (OTC: NIPNF) has experienced a downgrade from Citi, moving from a Neutral to a Sell rating, with a revised price target set at JPY 11,700, down from JPY 12,500.
The downgrade comes amidst a period of strong share price momentum for NEC, which has driven valuations to approximately 20 times the forecasted earnings per share (EPS) for the fiscal year ending in March 2026.
Citi's assessment suggests that a price-to-earnings ratio (PER) of 20 times is justifiable for companies that are anticipated to have medium-term operating profit growth rates of 15% or higher, or those with return on equity (RoE) or return on invested capital (RoIC) growth prospects increasing from 10% to 15%.
However, NEC is projected to show only a 10% profit growth, as per the adjusted operating profit compound annual growth rate (CAGR) from the fiscal year ending March 2024 to the fiscal year ending March 2027, with an RoE of just 8.4% for the fiscal year ending March 2027.
Based on these projections, Citi has deemed the shares to be fairly valued at 17.6 times the estimated EPS for the fiscal year ending March 2026, leading to the Sell rating. The decision reflects Citi's analysis of NEC's financial outlook, suggesting that the current market valuation may be overly optimistic given the company's expected financial performance.
NEC's stock performance will continue to be monitored by investors as they consider the implications of Citi's revised rating and price target. The change serves as a notable adjustment to NEC Corporation's market expectations and could influence investor decisions moving forward.
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