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Should Canon (CAJ) Stock Be in Your Portfolio?

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It has been a rough stretch for many companies in the technology world over the past few years as intense competition and pricing pressure have wrecked havoc on margins. However, some companies are starting to look well-positioned now, and may be primed for growth in the years ahead. One such company that you may have overlooked in this regard is the Japanese giant of Canon.

Company Overview

Canon Inc. (CAJ - Free Report) manufactures and sells office multifunction devices (MFDs), plain paper copying machines, laser printers, inkjet printers, cameras, and lithography equipment. The company operates in three segments: Office Business Unit, Imaging System Business Unit, and the Industry and Others Business Unit.  Canon’s main competitors include Ricoh (RICOY - Free Report) and Xerox Corp (XRX - Free Report) .


  CAJ RICOY XRX
Market Cap: $36.64B $8.24B $15.54B
Employees: 194,128 108,195 142,400
Revenue (ttm): $34.36B $20.20B $21.25B
 
  Canon Industry
Price/Earnings (TTM) 15.63 12.84
Price/Book (MRQ) 1.26 1.35
Price/Cash Flow (MRFY) 7.71 6.26
Dividend Yield 3.5% 1.79%
Net Profit Margin (TTM) 0.0673 0.0536
Return on Equity (TTM) 0.0847 0.1098
Debt to Equity (MRQ) 0 30.26
MRQ = Most Recent Quarter  
TTM = Trailing Twelve Months  
MRFY = Most Recent Fiscal Year  
       
 
As we look at the comparison above, Canon offers less value in terms of P/E & P/CF , but slightly beats in terms of P/book value. The dividend slightly beats the industry at 3.5% vs. 1.8% and offers about a percentage higher in net profit margin helping mitigate the results of the higher P/E. 

Financial Overview
Sales $35.537B
Gross Profit $17.12B
Net Income $2.28B
Income Before D&A $5.833B
Diluted EPS $1.91
* As of 12/31/13 FY

Valuation Measures
Market Cap $36.66B
Enterprise Value $29.12B
Trailing P/E 16.35
P/S(ttm) 1.07
P/B(ttm) 1.41
Enterprise/EBITDA 4.92
PEG Ratio 5.53
*Current as of 2014
 


After the recession, Canon initially grew revenue about 14% for a year then leveled off and eventually declined to about $34.8 billion for Fiscal year 2013.   Net income was more consistent than revenue which could be attributed to variable cost proportionate to the higher revenue.
 
*mean estimate 2009 2010 2011 2012 2013
Market Value $42.58 B $54.33B $56.2B $46.48B $39.19B
P/E 34.42 31.92 25.66 21.1 19.72
Book/Share 23.47 28.24 26.09 27.46 25.69







Historical Measures 
 


Price & EPS Surprise



Highlights
  • Market value growth seems to hit a peak of $54.33 billion in the past five years and have been declining since. 
  • PEG ratio at a value of 5.53 seems to be accounting future annual EPS growth. According to the PEG ratio of 5.53, analysts are projecting annual EPS growth to be somewhere in the range of 2.5%-3.0%.
  • With  valuations on the P/E (ttm), P/S (ttm), P/B (ttm) fronts of, respectively, 16.35, 1.07, and 1.41, CAI has higher valuations than competitors Ricoh and Xerox but also have to consider annual revenue that are a little less than double of both competitors.
First Half Results from January 1 to June 30, 2014
  •  As a result, consolidated net sales increased 0.6% in comparison to the first half of 2013.
  •  Net income attributable to Canon Inc. rose 19.6% from the first half of 2013 on a consolidated basis, and there was growth in both revenue and profit.
  • Sales for office business unit increased by 4.8% on a consolidated basis, in comparison to the first half of 2013.
  • Sales for imaging business unit decreased by 8.6% on a consolidated basis, in comparison to the first half of 2013.

  • There are no significant changes in sales growth or income before taxes, but the general trend seems to hold steady which is a good position to be in when setting up long term growth.  The office business unit is the clear money maker in Canon’s operations and saw significant sales growth from the same time last year.



Analysis

We currently have Canon as a Zacks Rank #1 (strong buy) and have reported a positive earnings surprise of 12% in the past year. 100% of our analysts have upgraded their earnings estimates for the current year estimating annual earnings of $2.08 per share.  As a clear leader within their respective industry, Canon should be a consideration for investors that are looking to invest in the camera industry.

The upcoming holidays should be helpful to their top line growth, but we will have to wait and see how they report earnings.  Investors should lookout for their next earnings statement coming soon that will report their third quarter results. 

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