Canon reported first-quarter results that were lower in sales and earnings than the year-ago period, as global economic pressures weighed on fundamentals. Although management expects moderate growth in the U.S. market, slightly stronger growth in China and other emerging countries, and a protracted recession in much of Europe, its guidance takes into account the recent strong currency moves from the Bank of Japan’s latest monetary easing. We are comfortable with our fair value estimate and narrow moat rating.
Canon’s office business unit revenue increased 6% from the year-ago period with operating profit increasing 13.7%. Unit sales of production printing mostly slowed, but were more than offset by a slight improvement in laser printers. In the imaging system business unit, revenue declined 1.8%, which translated into an operating profit decline of 39.1% from the year-ago period. Sales of interchangeable-lens digital cameras declined due to a supply glut from the flooding in Thailand last year, but Canon maintained its lead in global market share. The compact digital camera market continued its secular decline due to the increased popularity of smartphones. This was modestly offset by an increase in ink-jet printer sales.
In the industry and other business unit, semiconductor lithography equipment declined, reflecting the guarded capital expenditures for memory devices. Demand for flatpanel display lithography equipment for large-size panels continued to shrink. Total sales for the industry segment declined 31.6% with an operating loss of JPY 7.5 billion, or approximately $80 million.
For fiscal 2013, management expects demand for multifunction devices to mirror any recovery of the global economy, with a slight increase in the demand for laser printers. Interchangeable-lens digital cameras are expected to remain a growth driver in both developed and emerging markets, while compact digital cameras are expected to continue their decline. Management expects a recovery in the lithography equipment market for memory devices in the second half of the year. In total, fundamentals are expected to see modest improvements. However, given the shift in foreign exchange rates year to date, we believe currency will be a large driver of Canon’s results this fiscal year, with 80% of sales from outside Japan but more than half of manufacturing in Japan.
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