Morgan Stanley: Advantech’s third-quarter profit beats expectations as lower expense ratio offsets gross margin pressure

How much did third-quarter results beat expectations?

Advantech’s third-quarter revenue was 32.44 billion New Taiwan dollars, up 24% quarter over quarter and 83% year over year. It was 15% above Morgan Stanley’s forecast and 10% above the market consensus.
Operating profit was 6.795 billion New Taiwan dollars, 22% above Morgan Stanley’s forecast and 19% above the market consensus. The operating margin was 20.9%, above their respective forecasts of 19.7% and 19.4%.
Net profit was 6.185 billion New Taiwan dollars, up 124% year over year and 26% above the market consensus. The quarter also included 1.106 billion New Taiwan dollars in non-operating income, comprising 281 million New Taiwan dollars in gains on asset disposals and 151 million New Taiwan dollars in foreign exchange gains.

Rising component costs reduced the third-quarter gross margin by 1 percentage points quarter over quarter to 36.7%, below Morgan Stanley’s forecast of 37.8% and the market consensus of 37.9%.
Operating expenses were 5.101 billion New Taiwan dollars, broadly in line with Morgan Stanley’s forecast and below the market consensus of 5.473 billion New Taiwan dollars. With revenue above expectations, the actual expense ratio fell to 15.7%, below the bank’s forecast of 18.1% and the market consensus of 18.5%, supporting the operating margin beat.
Component supply remains tight. The company plans to secure supplies and pass on additional costs; the extent of cost pass-through will affect future gross margins.

The overall third-quarter book-to-bill ratio rose to 1.64 from 1.44 in the second quarter, meaning orders grew further relative to shipments during the quarter. Morgan Stanley expects a book-to-bill ratio that remains above 1 to support revenue growth over the next few quarters.
By region, the book-to-bill ratios in North America, Europe and China rose to 2.12, 1.52 and 1.50, respectively, from 1.92, 1.25 and 1.21 in the second quarter. Growth momentum spans several major markets.
Morgan Stanley is optimistic that the company will benefit from the long-term Internet of Things trend and increasing edge AI applications, while identifying slower deployment of edge AI as a downside risk.

Morgan Stanley rates Advantech Overweight with a price target of 720 New Taiwan dollars. Its base case uses a 2027 estimated price-to-earnings multiple of 30 times. The bank supports that multiple with its forecast of 30% compound annual earnings growth over 2025–2028.
By comparison, the report says the company’s average one-year forward price-to-earnings multiple was 25 times over 2015–2022, while compound annual earnings growth was 8% over the same period.