S&P comments as of 8/11/2004: # We see total revenue growth of 4.2% in 2004. We think price pressure could affect the growth rate of group sales by 5% to 10%. However, we expect that replacement demand for consumable products such as laser beam printer (LBP) ink cartridges and for newer digital still camera (DSC) models will mitigate pricing declines. # We forecast EBITDA margins to be stable at around 21% for the next few years, based on our view that Canon's management will be able to trim its cost structure. # For 2004, we project earnings per ADR of $3.25 (using an exchange rate of 0.008970 US$/JPY). We see earnings per ADR up slightly to $3.26 in 2005 (using an exchange rate of 0.008970 US$/JPY). We expect the main drivers to be strong demand for laser beam printers and digital still cameras.
# We think the stock's valuation is favorable in both intrinsic and relative terms. At $49 per ADR, Canon trades at about 15X our 2004 earnings per ADR estimate and 15X our 2005 estimate, at a discount to the peer group average and the Nikkei 225 benchmark. Also, our discounted cash flow model suggests the shares are undervalued. With above-average appreciation potential to our target price, we would buy the shares. # Risks to our recommendation and target price include an adverse change to the company's current OEM agreement with Hewlett-Packard and a continued decline in the selling prices of inkjet printers. # Our 12-month target price of $74 per ADR is based on a blend of peer analysis, P/E valuation, and our discounted cash flow model.