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July 29, 2009
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Canon Inc. (CAJ) profitability for the second quarter was well below the consensus estimate of ¥26.7 billion. The company reported revenue of $8,138.3 million (¥793.8 billion) and net income of $160.0 million (¥15.6 billion) or 13 cents per ADR (¥12.64 per diluted share) for the second quarter of 2009, which were much below our estimate of $9,251.1 million (¥880.7 billion) in revenue and net income of $264.1 million (¥25.1 billion) or 21 cents per ADR (¥20.37 per diluted share).
While Canon's revenue came in better than the previous quarter, it decreased 28.2% year-over-year, driven by the negative effect of the strong appreciation of the yen against the dollar, coupled with reduced sales volumes due to decreased demand for office equipment, network MFDs and laser beam printers.
Sales declined in all segments with the largest fall in the Optical and Other products, which fell 37.2% as sales for aligners steppers remained sluggish due to the worsening of market conditions for memory chips and falling prices of LCD panels. Business Machines segment also fell 30.3% as demand for office equipment continued to decline amid the rapid deterioration of economic conditions followed by a 20.7% decline due to falling prices and yen appreciation.
Other income fell by $228.0 million (¥21.9 billion), mainly due to currency exchange losses and losses on investments in equity method affiliates. As a result, net income also declined 12.1% sequentially and 85.5% from $1,032.2 million (¥107.8 billion) or 82 cents per ADR (¥85.51 per diluted share) reported last year.
Gross margin fell 550 basis points y-o-y to 43.5% due to sharp appreciation of the yen, falling product prices accompanied by reduction in sales volumes, despite continued product launches and ongoing cost-cutting efforts. Although, total operating expenses declined by 21.2% owing to group-wide expense reduction efforts, CAJ’s operating margin fell to 5.7% in the second quarter of 2009 from 14.5% in the year-ago quarter.
We believe the sharp appreciation of the yen is eroding Canon’s revenue and profits, which led the company to report dismal second quarter results. In the U.S., despite signs of a slight improvement in exports and consumer spending, capital spending dropped significantly. In Japan, the impact of the worsening global economy continued to be felt, resulting in decline in both exports and capital investment along with waning consumer spending due to deteriorating employment conditions.
As a result, Canon lowered its previously announced revenue guidance for 2009 by $1,250 million (¥130 billion) to $33,567 million (¥3,200 billion), which is a fall of 21.8% from 2008. Although it increased its operating profit forecast by $11 million (¥10 billion) to $1,993 million (¥190 billion), it was still a decline of 61.7% from the last year. Canon’s full-year 2009 net profit forecast remained unchanged at $1,154 million (¥110 billion), a decline of 64.4% from the year-ago period.
The diversified nature of Canon’s business portfolio makes comparison to its U.S. based peers more difficult. Increasing price competition and slowing consumer demand for some of its office equipment, cameras, and optical products are causes of concern, as are decreasing profit margins. Competition from Panasonic Corp (PC), Sony Corp (SNE) and Kyocera Corp (KYO) is also heavy.
We expect revenue in 2009 to be hurt by weak consumer spending and believe the company will struggle to meet expectations in fiscal 2009. We maintain our Sell recommendation on the stock.
Read the full analyst report on "CAJ"
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