Canon Inc.
(CAJ)
By: Dan Coyne
Patrick Burgess
Harry Wang
Stephen Kretz
Wednesday, March 28, 2007
Why Canon
• Selection Criteria
– New York Stock Exchange, NASDAQ and AMEX
– P/E ratio for last fiscal year less or equal to 20
– Return on equity (ROE) greater or equal to 10%
– Price to book less than or equal to industry average
– Dividend yield greater than 0
– Total debt to equity ratio less than or equal to 2
– Market capitalization greater than $1B.
– Quarterly Rev. growth greater than industry
Ratio Numbers
• P/E: 18.90
• ROE: 16.92%
• Price to Book: 2.91
• Dividend Yield: 1.40%
• Debt to Equity: .01
• Market Cap: $72.97 B
• Quarterly Rev. Growth (YOY): 8.60%
Company Background
Company Background
• Manufactures plain paper copying machines, laser printers,
inkjet printers, cameras, steppers and aligners.
• Three product groups:
– Business machines, cameras, and optical and other products.
– The business machines product group is divided into three sub
groups
» Office imaging products and computer peripherals
» Business information products
» Optical and other products include steppers and aligners
used in semiconductor chip production, projection aligners
used in the production of liquid crystal displays (LCDs),
broadcasting lenses and medical equipment.
Company Background
Company Background
• Canon is the supplier of print engines found in the
hugely popular Hewlett-Packard LaserJet series
of laser printers.
• Canon has also entered the digital displays
market by teaming up with Toshiba to develop
and manufacture flat panel televisions based on
SED, a new type of display technology.
• Canon has also announced it is developing
OLED displays.
Management
CEO
• Fujio Mitarai
• “Mitarai Way”
– Focused on profits while incorporating Japanese values.
• Mitarai is less concerned with his salary than with the
success of his company. "I'm motivated by my
ambition of turning Canon into a truly excellent
company," he told Business Week Online. His goal is
to make Canon number one in cameras, ink-jet
printers, and semiconductor manufacturing equipment
over the next few years.
Management
CEO
• March 12th, 2007
– Canon, the world's top camera and copier maker, said on
Monday it will spend 30 billion yen ($253.5 million) on a
research facility to develop new factory automation and other
technology to cut production costs.
• March 8th, 2007
– Planning to acquire up to 17 million more shares between
March 9th and April 9th
– Reason for acquisition of own shares
» The Company decided to acquire its own shares with the
aim of improving capital efficiency and ensuring a flexible
capital strategy that provides for such future transactions
as share exchanges.
• March 7th, 2007
– Acquired 15.423 million shares.
– Previous board meeting in Feb. 15th allowed specific amount
and they bought the maximum level
Industry Comparison
Industry Comparison
Basic Chart
Facts
• Completed $850M stock buyback between Feb. 16th
and March 6th , 2007
• Very low debt: $150M long-term debt
• Canon controls 37% of the digital camera market; up 4%
from last year
• Yen down 2% year-on-year against both the dollar and
euro; increasing demand for their products
DCF -Forecast
• Assumptions
– Revenue Growth Rate
• Increase to 11.2% in 2007E then gradually
decrease to 4.5%
– Net Income (% of Sales)
• Increases to 11.8% in 2011E then stays constant
at 11.0%
– Capital Expenditures (% of Sales)
• 10.2% in FY 2006
• Decreases gradually over forecasted years to
8.0%.
– Depreciation (% of Sales)
• 3% less CAPEX (based on historical data)
DCF –Discount Rate (RE)
• CAPM
– Risk-free rate (Rf): 5.38%
• 10 year average 30-year T-Bond Yield
– Market risk premium (Rm–Rf ): 5.30%
• Based on historical average
– Beta (β): 0.88
• Yahoo! Finance
• RE = Rf + β(Rm–Rf) = 10.04%
DCF –Cont’d
Discount Rate
10.04%
PV of Projected Cash Flows
PV of Terminal Value CF
$18,080,188
$66,999,732
Fair Value
Shs. Outstanding (thousands)
Per Share Fair Value
$85,079,920
1,330,000
$63.97
Current Share Price
Margin %
$55.91
14.4%
Cons
• Management is getting old
• Company is somewhat secretive
• Highly competitive industry
Pros
• DCF
• Cutting cost in comparison to major competitors
“Mitarai’s Way”
• Industry comparison as a whole
• Ratio criteria
• Our figure in line with analyst’s estimates, within
$0.15
• Jump in 2006 revenue
• Profit margin has been increasing over the past 5
fiscal years
• All analysts say strong buy
Our Recommendation
• BUY
• Reasons
– DCF
– Best of Breed (Comparison to
Industry/History)
– Favorable Ratios
– Management’s Proven Track Record