NEC, founded in 1899 and headquartered in Tokyo, Japan, delivers core products and services in IT and network solutions, including telecommunications equipment, cloud computing, artificial intelligence, as well as IoT platforms for enterprise, government, and communications providers. The company operates through two segments including IT Services and Social Infrastructure across Japan, America, Europe, Middle East, Africa and Asia Pacific.

Strategic US expansion

NEC announced the acquisition of CSG Systems International, Inc., for $80.7 per share, valuing the deal at $2.9bn (JPY 441.7bn), with an implied enterprise value of $2.9bn and a 17.4% premium. The deal is funded through a combination of cash and new borrowings, making CSG a wholly owned subsidiary. In addition, the acquisition is expected to facilitate stable earnings, with a 7.7% y/y growth in NEC'S EPS. Integration of CSG's robust US telecom/broadband and multi-industry customer base, NEC's software and services portfolio and supports international reach.

Consistent cash growth

NEC reported a steady top-line performance over FY 22-25, posting revenue CAGR of 4.3% to reach JPY 3.4tn, propelled by robust demand for 5G and network services, strategic acquisitions, and digital transformation. EBIT rose at a CAGR of 24.6% to JPY 256.0bn, with the margin expanding from 4.4% to 7.5%.

Over FY 22-25, FCF rose from JPY 113.0bn to JPY 201.0bn, supported by growth in cash inflow from operations, rising from JPY 148.0bn to JPY 344.0bn. This led to cash and cash equivalents rising from JPY 431.0bn to JPY 585.0bn.

NEC delivered decent revenue growth over H1 26, driven by increased domestic demand for IT services, and large-scale projects in ANS (Aerospace/Defense). In addition, operating margin improved by 455bp to 7.6%.

In comparison, Fujitsu Limited, a local peer, reported revenue CAGR of -0.3%, reaching JPY 3.6tn over FY 22-25. EBIT fell at a CAGR of -2.8% to JPY 239.0bn; margin contracted from 7.3% to 6.7%.

Looking ahead, analysts anticipate an EBIT CAGR of 21.3% over FY 25-28, reaching JPY 457.5bn with a margin of 11.5% in FY 28. In addition, analysts estimate a net profit CAGR of 23.2%, reaching JPY 327.5bn. Likewise, for Fujitsu, analysts estimate an EBIT CAGR of 20.8% and a net profit CAGR of 15.2%.

Robust stock returns

Over the past year, NEC delivered 123.2% returns. In comparison, Fujitsu delivered returns of 47.1%. The company paid an annual dividend of JPY 28.0 in FY 25, resulting in a dividend yield of 0.9%.

NEC is currently trading at a P/E of 31.4x, based on FY 26 estimated EPS of JPY 183.5, which is higher than its 3-year historical average of 18.5x and Fujitsu (17.1x). The company is currently trading at an EV/EBIT multiple of 21.9x, based on FY 26 estimated EBIT of JPY 344.5bn, which is higher than its 3-year historical average of 13.8x and Fujitsu (19.4x).

NEC is monitored by 10 analysts; nine have 'Buy' ratings and one has a 'Hold' rating for an average target price of JPY 5,860.0. However, as the stock has already reached its target; only a near-term correction in the share price could create a buy opportunity for investors.

Overall, NEC has delivered strong historic growth and improved operating performance, underpinned by digital transformation and strategic US expansion, positioning it for sustainable earnings momentum. However, it may face critical risks including maintaining quality control and safety across its global supply chain, cybersecurity threats and challenges in human capital retention.