Omron Corp (6645:JP) (OTC: OMRNY) received an upgraded stock rating from Citi, moving from Neutral to Buy. The firm also increased its price target for the company's shares from JPY6,600.00 to JPY7,400.00. The upgrade comes after a period of underperformance by Omron's shares in comparison to the TOPIX index, with a 15% lag year-to-date and a 58% gap over the past three years.
The underperformance has been attributed to several factors, including a decline in operating profit after a peak in FY3/23 and three consecutive years of negative free cash flow.
This was partly due to an investment in JMDC and challenges such as a macroeconomic slowdown in China and increasing competition from local firms in that region. Despite these hurdles, Citi notes that Omron's management has taken proactive steps to address the issues.
One of the key measures implemented by Omron's management is the introduction of the company's first early retirement program (ERP) in two decades, which is expected to save around JPY30.0 billion next year.
Additionally, the company's strategy to boost solution sales within its Industrial Automation Business (IAB) division appears to be yielding positive results.
Citi points out that Omron has limited sensitivity to yen strength, and with an upcoming presentation on the Data Solutions Business scheduled for October 3, the firm anticipates potential for stock price appreciation.
The raised price target is based on a Sum of the Parts (SoTP) valuation method. The optimism surrounding the company's strategic responses and potential upside has led to the decision to upgrade the stock rating and raise the price target.
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