Canon, Inc. (CAJ) is one of the world's leading designers, manufacturers and marketers of office equipment, cameras and optical products. The company's investment in digital cameras has given it an industry leadership position and has been a significant contributor to growth.
However, strong Yen appreciation have caused the company to lower its outlook for 2008 and pressures in developed nations pose further risks to sales. Management expects products contribution to be accelerated in the second half of the year, thorough reductions in cost and expense. The company expects to overcome the challenging environment and achieve the ninth consecutive year of sales and profit growth for 2008.
For the full year 2008, CAJ expects capital expenditure of ¥435 billion, depreciation of ¥370 billion, free cash flow of ¥255 billion and operating cash flow of ¥745 billion. Canon expects cash and cash equivalents to be ¥960 billion with a dividend of ¥110 per share by the 2008-end.
Canon is currently trading at 13.2x estimated 2008 EPADR, a premium to the industry mean and median. Although we believe that some premium is warranted given its strong position in the digital camera business, we don't see room for meaningful appreciation from current levels.
The diversified nature of Canon's business portfolio makes sustained growth difficult, and at the same time, makes comparison to its U.S.-based peers more difficult. Increasing price competition and slowing consumer demand for some of its optical products are causes for concern, as are decreasing profit margins.
We, therefore, maintain a Hold rating to reflect the stock's full valuation and set our six-month price target to $53. This price is based on a P/E multiple of 13.5x our EPADR estimate of $3.93 for 2008, a premium to the industry mean and median.
Read the full analyst report on CAJ.
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