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CLSA Downgrades Canon to ‘Underperform’

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Price movement 

Canon (CAJ) has a market cap of $38.5 billion. It fell by 2.1% to close at $28.18 per share on July 15, 2016. The stock’s weekly, monthly, and YTD (year-to-date) price movements were -0.04%, -0.81%, and -6.5%, respectively, on the same day. CAJ is trading 1.9% below its 20-day moving average, 1.2% below its 50-day moving average, and 3.8% below its 200-day moving average.

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Related ETF and peers

The Vanguard FTSE Pacific ETF (VPL) invests 0.67% of its holdings in Canon. The ETF tracks the FTSE Developed Asia Pacific Index, a market-cap-weighted index of securities in the developed markets of the Pacific region. The YTD price movement of VPL was 3.0% on July 15.

The market caps of Canon’s competitors are as follows:

  • HP (HPQ)—$23.8 billion
  • Kyocera (KYO)—$18.8 billion
  • Xerox (XRX)—$9.8 billion

Canon’s rating and performance in fiscal 1Q16

CLSA has downgraded Canon to “underperform” from “buy.” Canon (CAJ) reported fiscal 1Q16 net sales of 797.2 billion Japanese yen, or about $7.6 billion—a decline of 7.0% from the net sales of 857.4 billion yen, or about $8.1 billion, in fiscal 1Q15. Sales from Office and Imaging System units fell by 14.1% and 10.6%, respectively. Sales from Industry and Other rose by 45.8% between fiscal 1Q15 and 1Q16.

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Its net income and EPS (earnings per share) fell to 28.0 billion yen and 25.6 yen (about $265 million and ~$0.24), respectively, in fiscal 1Q16, as compared with 33.9 billion yen and 31.1 yen (about $321 million and ~$0.30) in fiscal 1Q15. Canon’s cash and cash equivalents fell by 8.3%, and its inventories rose by 3.9% between fiscal 4Q15 and 1Q16.

In fiscal 1Q16, Canon’s current ratio fell to 1.3x, and its debt-to-equity ratio rose to 0.60x, as compared with 2.5x and 0.39x, respectively, in fiscal 4Q15.

Projections

Canon (CAJ) made the following projections for fiscal 2016:

  • net sales of 3.6 trillion yen, or about $34 billion—a decline of 5.3% from fiscal 2015
  • operating profit of 300 billion yen, or about $2.8 billion—a decline of 15.5% from fiscal 2015
  • net income of 200 billion yen, or about $1.9 billion—a decline of 9.2% from fiscal 2015

These declines in performance are mainly due to the global economic slowdown and the drop in oil prices, which restrict the ability of the US to raise interest rates. Overall, this has helped strengthen the yen since the beginning of 2016.

In the next part, we’ll look at VF Corporation.

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