Canon (7751) – Responding to the Wake-Up Call
For years, Canon has used its cash position to shore up a share price, which won plaudits from stock market purists but hid the fact that the company was sliding into difficulty. However, following the acquisition of Toshiba Medical, there is no more cash, so the share price is set to sink or swim on business performance alone.
Unfortunately, the firm’s two main businesses, copiers and cameras, are at best mature, and possibly in decline. To offset this, Canon needs to get costs down, notably staffing, which has soared over the past decade. Fortunately, improving business conditions give the company breathing room, while new businesses give the company both top-line and bottom-line growth.
The evidence is patchy that the firm is committed to cost-reduction, but it exists sufficiently (be it by accident or design) to suggest that current earnings gains are sustainable. There is a lot more that the company could do, adding considerably to the potential upside, which imbalances the risk / reward situation.
Key Points
- All major business lines are seeing a cyclical upswing for now, but the longer-term outlook for most is less rosy.
- New product lines (network cameras and NIL) and new businesses (Toshiba Medical) help but aren’t big enough on their own.
- Employment is coming down in Japan. This may be accidental (natural attrition) but it is encouraging either way.
- Valuations are stretched but come into line quickly if costs are reined in.
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.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
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