Focus, Canon, your zoom’s gone wide
Canon Inc. may be doing should be good news. According to a Nikkei report Friday, the Japanese camera and printer maker is likely to raise its full-year operating profit forecast by more than 20 per cent to 330 billion yen ($2.9 billion) from an April estimate of 270 billion yen.
Strong sales of printers in emerging markets are behind the expected improvement of Canon’s bottom line, aided by good M&A integration and automation, Nikkei says.
Rather than cheer the news, investors gave a polite golf clap in morning Tokyo trading. Not that a rise of as much as 1.7 per cent isn’t healthy, but it doesn’t compare to the stock’s 3.1 per cent intraday climb one day last week.
Canon’s shares have advanced 7.3 per cent since April 26, when the company originally increased its full-year operating profit forecast after strong first-quarter results. The further 20 per cent rise in earnings expectations should elicit a stronger reaction, especially in Japan’s weak corporate environment. Granted, the Nikkei news report isn’t an official adjustment, but surely there are traders out there ready to latch onto any positive development.
Canon’s current valuation doesn’t seem askew either: It’s trading at 23.7 times earnings, well below the 44.5 times average of its peers and in-line with the median.
One of the key concerns I have is that this rosier picture is centred more around an ageing business than any indication Canon is changing its fundamentals. better than expected. That
Canon sales from cameras 32%
To be sure, reports that automation is improving efficiency and boosting margins are encouraging. Yet the fact that Canon’s key driver is in the older printer category instead of newer areas like industrial machinery is probably what’s giving investors pause.
In a series of reports published on SmartKarma, researchers at Pelham Smithers Associates have outlined the challenges facing Canon, and have compared its business to the successful restructuring undertaken by Sony Corp.
The problem we’ve had with Canon is that it has assumed that its problems in cameras and printers are cyclical not structural, and held off from undertaking the necessary surgery.
More than 53 per cent of Canon’s sales last year came from its printing division, and 32 per cent from its camera unit. Both percentages will drop this year, chiefly due to Canon’s acquisition of a medical-devices unit from Toshiba Corp.
The company’s hidden gem is Canon Tokki. As Bloomberg’s Pavel Alpeyev and Takashi Amano outlined in December, this little-known unit has a commanding lead in providing the equipment needed to manufacture OLED screens. These are the awesome, yet troublesome, displays that may limit supply of Apple Inc.’s new iPhone.
From my own discussion with sources in the supply chain, Tokki remains the critical bottleneck in the ability of Samsung Electronics Co. and others to churn out more OLED displays. Canon doesn’t seem to recognise the golden goose it has nesting.
In comments to investors in April, Canon devoted just one paragraph to explain that it’s “working to standardise and raise the efficiency of the manufacturing process in order to respond to the strong demand.”
Having cornered the market for a critical step in one of the electronics industry’s hottest new segments, Canon is sitting on a business that should provide the basis for multiyear growth and development. Instead, executives seem obsessed with boosting sales in a legacy area that faces plenty of competition and continued headwinds.
No wonder investors are unimpressed.