Should You Stay Away from Canon?

GuruFocus.com

Canon Inc. (CAJ) and its subsidiaries are engaged in the manufacture and sale of office multifunction devices, plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Strong Competition

The company sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. As of Dec. 31, 2012, the company's manufacturing is conducted primarily at 28 plants in Japan and 17 plants in other countries.


The company operates its business in three segments: Office Business Unit, Imaging System Business Unit, and Industry and Others Business Unit. Although, Canon faces intense competition in all areas of its business, it has a solid market position. Canon's competitors range from some of the world's major multinational corporations to smaller, highly specialized companies.

Canon is a market leader in all areas in the U.S. and in countries in Europe and in Japan. In China, the company will expand its customer base by introducing products tailored to the Chinese market and by strengthening sales and service channels. In this country, the current market leaders are Toshiba (TOSYY), Sharp and Konica Minolta Holdings.

Healthcare Legislation

Canon will feature a comprehensive set of products and solutions that help enable a more rapid, simplified admission process and help ensure that patient information is accurately recorded and secure. As adoption of EHR systems continues to increase, Canon offers solutions that help managed a growing number of EHRs. These electronic systems help ensure a comprehensive view of each patient's medical record.

Major Risks

Market contraction and exchange rate fluctuation risks are having a major impact in the digital camera market. As a matter of fact, the firm is going to shift some digital camera production back to Japan, winning from a weakening of the yen.

Analyst Recommendation

The firm is currently Zacks Rank # 5 - Strong Sell, and it also has a longer-term recommendation of "Underperform". For investors looking for a Zacks Rank # 1 - Strong Buy, Lexmark International Inc. (LXK) and Pitney Bowes Inc. (PBI) could be the options.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 15.4x, trading at a discount compared to the mean industry. Earnings per share (EPS) slightly increased by 2.3% in the most recent quarter compared to the same quarter a year ago.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year prior. Let�s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

CAJ

Canon Inc.

8.64

PBI

Pitney Bowes Inc.

75.81

RICOY

Ricoh, Ltd.

3.62

XRX

Xerox Corporation

9.42



As we can see, the firm has a higher ROE than Ricoh, Ltd (RICOY), but far less than the ones from Xerox Corporation (XRX) and Pitney Bowes, Inc. (PBI).

Final Comment

As outlined in this article, Canon had a disappointing performance in the stock itself and disappointing ROE. However, its advances in the healthcare industry, by delivering more efficient workflow processes while reducing expenses and making secure the patient data to comply with regulations are growth drivers for the near future.

According to Yahoo! Finance, the estimated one-year target share price is $35, so if you buy shares at current market price ($29.92), your return from price appreciation would be 17%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 53.1 cents per share each quarter, totalizing $2.124 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.8%. So the total expected return for investing in Canon is 18.8%.

Its closed price level was 19.59% lower from its price level of one year ago. Although Zacks Rank, in looking at the bigger picture, I would recommend investors to add Canon to their long term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like John Rogers (Trades, Portfolio), John Hussman (Trades, Portfolio) and Charles Brandes (Trades, Portfolio) have taken long positions in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.

This article first appeared on GuruFocus.
View Comments (0)