Canon’s Worth Is Coming Into Focus

by Jon Markman | April 20, 2012 1:33 pm

Imaging is at the very center of the digital and social revolution, and one Japanese company has benefited more than any other: Canon (NYSE:CAJ[1]).

Canon is known for its iconic DSL cameras, but it is about so much more than snapshots. At more than $55 billion in market cap, Canon manufactures and designs a raft of imaging and optical equipment including video recorders, photocopiers, binoculars, film and printers.

Canon got its start as Precision Optical Instruments Laboratory in 1937. A couple of years prior, co-founder Goro Yoshida helped produce Japan’s first 35 mm camera with a focal plane-shutter. From its humble beginnings in a small apartment, Canon went on to become a pioneer in several optical technologies, including developing Japan’s first indirect X-ray camera, the world’s first camcorder with a zoom lens, the first bubble jet printer, and many other breakthroughs.

In 1955, Canon finally entered the global market, opening its first U.S. office in New York City. Two years later it partnered with Europe to distribute its cameras, and exports quickly became nearly half of the company’s total sales. The 1960s is when the firm began to diversify beyond the camera market, entering the office equipment market with the debut of the world’s first 10-key electronic calculator, as well as several copier products. This led to a name change from Canon Camera Co. just Canon Inc.

CAJ 300x194 Canon's Worth Is Coming Into Focus
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The firm now has 200,000 employees in offices around the world. Fun fact: It is the fourth-largest patent holder in the United States, spread out among consumer, office and industrial sectors.

Canon’s office segment is its largest revenue base, providing more than half of the company’s sales. If you work in any office environment around the world, there’s a good chance you use a Canon product — even if its name isn’t on the label.

Its copiers and laser printers lead the segment, but it also is an original equipment manufacturer for other office equipment firms like Hewlett-Packard (NYSE:HPQ[2]). In fact, HPQ accounts for 20% of Canon’s total revenues, split between black-and-white and color products.

According to analyst Michael Holt with Morningstar, the company’s biggest headwind in the office supply group is the continual shift from black-and-white to color machines. While most analysts believe volumes have peaked in the former, better margins on the color side should help Canon navigate the shift successfully. In fact, although color currently only accounts for 33% of sales, it delivers more than 50% of the printer segment’s revenues.

The consumer segment is led by the sale of digital single lens reflex (DSLR) cameras. Despite the fact that every mobile phone these days is equipped with a digital camera — and that Facebook just paid $1 billion to purchase Instagram[3] — the mobile photo sharing platform, there’s still solid growth in traditional digital cameras.

Canon and rival Nikon together control two-thirds of the DSLR market, which consists of higher-end equipment used by both professionals and novice photographers. Although only 23% of Canon’s camera sales are from DSLRs, they already represent nearly 70% of its revenue in this segment, and those figures are growing.

Fujio Mitarai took over as chief executive just a few weeks ago, but has been with the company since 1961. He has held several management positions, including president of its U.S. operations for the past two decades. Mitarai takes over after a tough year for the company, which included multiple natural disasters as well as the economic woes that have plagued Europe.

The biggest obstacle moving forward is not the company’s internal operations, but rather the appreciation of the Japanese yen[4]. More than half of Canon’s plants are located in Japan, yet most of its sales are generated outside the country. This means costs remain high while its products have become more expensive compared to non-Japanese competitors.

Management has expressed confidence that its operating improvements and emerging market growth will offset any continued yen appreciation moving forward. Despite the headwinds, Canon still was able to grow its net income for the second consecutive year while improving profit margins.

In 2011, Canon represented a classic case of an industry giant operating in a less-than-optimal economic market environment, but as the market bounces back, the improvements the company has made will leave it in an even better competitive position moving forward. Shares are trading at just 12.8 times next year’s earnings, discounted well below its five-year average. It’s a good buy.

Jon Markman operates the investment firm Markman Capital Insights[5]. He also writes a daily trading newsletter, Trader’s Advantage[6], and a long-term investment service, Strategic Advantage[7]. Check out his Top Stock for 2012 here[8].

Endnotes:
  1. CAJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAJ
  2. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  3. Facebook just paid $1 billion to purchase Instagram: http://investorplace.com/ipo-playbook/facebook-shells-out-1-billion-for-instagram/
  4. appreciation of the Japanese yen: http://investorplace.com/2012/02/the-japanese-yen-handle-with-care/
  5. Markman Capital Insights: http://www.markmancapital.net/
  6. Trader’s Advantage: http://www.jonmarkman.com/
  7. Strategic Advantage: http://www.markmancapital.net/
  8. Top Stock for 2012 here: http://investorplace.com/2011/12/short-europe-emerging-markets-hershey-consumer-staples/

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