Morningstar | Trimming Our Canon FVE to JPY 3,700; Competition a Concern, but Dividend Will Support Shares
We have fine-tuned our earnings forecast for no-moat Canon and trimmed our fair value estimate to JPY 3,700 per share from JPY 3,900 and to $34 per U.S. ADR from $36. We retain our view that Canon’s profit will remain fairly flat over our five-year forecasting period, as steady growth in network cameras and lithography equipment for semiconductors will be offset by the gradual contraction of the copier and digital camera markets. We think the shares are supported by Canon's rich shareholder return. The dividend yield of approximately 5% should be attractive for investors, and considering that it has been 4%-5% over the past five years, we believe that the downside for the share price will be limited.While Canon and Nikon had dominated the digital single-lens reflex camera market for a long time, Sony launched a full-frame mirrorless camera in 2013 that was a game-changer. Thanks to its simple mechanics, the mirrorless camera has an advantage over DSLR cameras on weight, and Sony’s expertise in image sensors contributed to quickly improving picture quality. Canon and Nikon hesitated to directly compete with Sony by entering the mirrorless camera market, as they were concerned about the cannibalization of their own DSLR ecosystems. Canon and Nikon eventually launched full-frame mirrorless cameras in 2018, but five years of lead time enabled Sony to establish its own ecosystem and to quickly catch up with other two players. We therefore forecast that intense competition among the three players will continue to drag down Canon’s operating margin.
Canon’s operating income guidance for fiscal 2019 is JPY 325 billion, assuming JPY 105 per U.S. dollar and JPY 125 per euro. We think this number is optimistic as Canon's revenue guidance looks somewhat stretched. We forecast JPY 335 billion for fiscal 2019, assuming JPY 110 per U.S. dollar and JPY 130 per euro, which is approximately 8% lower than the guidance on the same currency assumptions.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
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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