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On Sep 13, 2013, we downgraded our recommendation on Fujifilm Holdings Corporation (FUJIY - Analyst Report) to Neutral from Outperform, based on weak demand for compact digital cameras in the first quarter of fiscal 2014.

Why the Downgrade?

Fujifilm experienced a loss of business in the first quarter of fiscal 2014, due to a reduction in demand for compact digital cameras as well as information technology equipments. The decline is sales of digital cameras was the result of increased demand for smartphones. This led to lower Imaging Solutions segment revenues.

Moreover, Fujifilm’s diversified product portfolio exposes it to stiff competition from different market players of different products. In such a scenario, it becomes difficult for the company to manage its prices while keeping a check on the costs.

Fujifilm has a significant presence in the Americas, Europe and Asia, apart from Japan. Roughly 58.9% of the company’s total revenue in the first quarter of fiscal 2014 was generated outside Japan. The varying socio-political environment of each country makes it challenging for Fujifilm to cope. Moreover, the company’s results in the quarter were hurt by the ever-increasing prices of raw materials. This may induce high cost of production, impacting margins.

However, we cannot overlook the rising business of the company in the pharmaceuticals business accompanied by the Documents Solutions business. Fujifilm has been attempting to gain a greater market share with the introduction of new products. The company recently launched products ranging from lenses to printers.

Other Stocks to Consider

Fujifilm currently carries a Zacks Rank #3 (Hold). Other stocks worth a look in the industry include Ciena Corporation (CIEN - Analyst Report), Alliance Fiber Optic Products Inc. (AFOP - Snapshot Report) and Axcelis Technologies Inc. (ACLS - Snapshot Report). While Ciena Corp. carries a Zacks Rank #1 (Strong Buy), Alliance Fiber and Axcelis Tech. carry a Zacks Rank #2 (Buy).

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