Morningstar | Slowdown on OLED Panels and Cameras Are Mostly Priced in; Trim Canon FVE to JPY 4,200
No-moat Canon cut its operating income guidance for fiscal 2018 to JPY 378.5 billion from JPY 404 billion, owing to: 1) worse-than-expected product mix on copiers and cameras; 2) contraction of compact digital camera market; and 3) slower demand of OLED panels. We had indicated in our April note that Canon's guidance on imaging system segment looks stretched, but the new guidance was even below our original forecasts. Given recent trends above, we nevertheless believe Canon's revenue assumption on the second half is still optimistic, and as a result, we revise our operating income forecast to JPY 365 billion, which is below the new guidance. Accordingly, our new fair value estimate is lowered to JPY 4,200 per share and $38 per U.S. ADR. As the stock has dropped approximately 20% from its recent peak in February, we see the slowdown on its fundamentals as well priced in, and the dividend yield of 4.8% will be attractive for investors; and we therefore believe the downside on its shares will be limited. We will retain our view that revenue growth of new businesses, such as network cameras and medical systems, will be mostly diluted by the market contraction of copiers and digital cameras.While Canon has been the global top player in the digital camera market for a long time, we forecast that the revenue will continue to decrease; compact cameras are threatened by smartphones, and interchangeable lens cameras, or ILCs, are exposed to the tough competition with Sony, catching up with the competitive mirrorless cameras. In fact, Canon was forced to cut its unit shipment assumption for compact cameras and its product mix assumption for ILCs for this fiscal year. Canon had been reluctant to launch mirrorless cameras as the company was concerned about the cannibalization with its existing product lineups. However, the tough competition requires Canon to sell mirrorless cameras at a reasonable price, which may worsen its product mix in the longer term.
Canon 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. Co. 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, 2017, Co.'s manufacturing is conducted primarily at 30 plants in Japan and 18 plants overseas. Co. operates its business in four segments: Office Business Unit, Imaging System Business Unit, Medical System Business Unit, and Industry and Others Business Unit.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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