FUJIY Lowered to Underperform

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We have downgraded our rating on Fujifilm Holdings Corporation (FUJIY) from Neutral to Underperform based on the plight of rising raw material costs and yen depreciation.

The raw material used by the photographic product maker primarily includes silver and aluminum, among others. These products are highly volatile, and therefore fluctuating demand may lead to rise in prices. Hence, such surging raw material costs are likely to hurt the company’s profitability, posing a major risk to Fuji’s operating margins and thereby future earnings.

Also, a significant portion of the company’s internationally generated income gets affected due to exchange rate fluctuations, resulting from depreciating yen. Furthermore, Fujifilm is exposed to global economic fluctuation, which continues to pressurize Fujifilm’s revenue from international business.

On the other hand, effect of the Great East Japan earthquake and floods in Thailand in 2011 remain a lingering concern, which may continue to jeopardize Fuji’s domestic demand as well.

Mention may be made of a highly competitive industry wherein Fuji’s low end digital camera market faces firece rivalry from competitors--who have been developing, launching and marketing advanced digital products. Moreover, overcapacity in photo-imaging and photographic films sector imposes pressure on the company’s traditional businesses.

However, hope survives as we witness Fujifilm’s diversification beyond the domestic photographic film market, especially the emerging regions. This diversification strategy is anticipated to bolster the company’s financial results over the forthcoming quarters, strengthening the company’s demand across these regions.

Further, to counter rising expenses, the company focuses on structural reform programs ensuring margin management toward a cost-effective business. The company continues to proactively invest in priority business fields targeted to position Fujifilm as a sustained and profitable corporation with large market share.

We believe that the company’s huge talent pool and envious brand equity will support its product portfolio in response to growing market needs. Moreover, the company’s continuous focus on technological innovation along with strong sales promotion look impressive enough to lay a solid foundation for the company’s future. 

Fujifilm is engaged in developing, manufacturing and marketing traditional and digital imaging products and competes with another global player, Canon Inc. (CAJ).

The company has a Zacks #5 Rank, implying a short-term (1-3 months) Strong Sell rating.

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