Canon: A Diamond In The Rough Or A Cautionary Tale? A DCF Analysis

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Investment Thesis

With nan year-end net released, I decided to look astatine nan financials of Canon (NYSE:CAJ) to spot if location is simply a imaginable for a semipermanent position connected nan horizon. Stellar FY22 results and debased P/E ratio caught my attraction and moreover pinch debased maturation successful USD terms, nan institution is simply a bargain based connected my DCF valuation and gives immoderate vulnerability to world markets.

This article will attraction chiefly connected nan company's financials and a small spot astir nan company's imaginable maturation to travel up pinch immoderate reasonable maturation assumptions for nan adjacent 10 years to spot if this is worthy of a semipermanent clasp and if nan institution has immoderate coagulated prospects. The maturation assumptions will beryllium blimpish pinch a decent separator of information baked into nan DCF analysis.

FY2022 Results

A mates of weeks agone nan institution published its full-year 2022 results connected its investor relations site. The numbers I saw were very good. The institution has been steadily increasing still successful double digits. Growth successful nan printing and imaging segments is going beardown acknowledgment to nan return to agency crossed nan world. It seems that this will proceed to amended complete nan coming years arsenic much and much companies spell backmost to their offices aft nan pandemic. The printing Segment had a coagulated 16.7% y-o-y growth, while Imaging had 22.9% growth.

Sales successful Japan accrued only 4% twelvemonth connected year, however, nan Americas person shown a 30% summation successful sales, followed by Europe astatine a 15.5% summation and Asia and Oceania astatine 7.1%, giving nan full income summation y-o-y of almost 15%. That is rather a coagulated twelvemonth for nan company. All these results lead to a bottom-line summation of 13.6% y-o-y.

What's Ahead for nan Company

The guidance believes it will spot beardown request for their agency MFDs and their interchangeable lens integer cameras. People request high-quality individual devices and Canon is nary slouch present for sure. This optimism has swayed my valuation exemplary somewhat; however, I americium toning it down conscionable to beryllium connected nan safe side.

We person been successful nan pandemic era for nan past 3 years now. The concerns will ever linger, but I do judge that these concerns will beryllium overmuch smaller than they person been 1 aliases 2 years agone erstwhile productivity was obliterated crossed each offices and group started to activity from home. Right now, galore companies person adopted nan hybrid environment, pinch immoderate places making their labor activity from location only 2 days a week. Some are afloat backmost successful nan office, and immoderate are still WFH. The request for Canon's MFDs I judge will proceed to turn arsenic we get retired of nan pandemic; however, it whitethorn not beryllium arsenic robust arsenic it was pre-pandemic.

Growth successful nan US

In November of 2022, nan institution announced that they are establishing a caller subsidiary that will fortify its beingness successful nan US aesculapian market. This will accelerate maturation for nan conception which grew 6.9% y-o-y and 17.4% successful Q4 of 2022. The aesculapian conception is nan 3rd largest gross generator for nan institution and much vulnerability to nan astir influential aesculapian marketplace successful nan world will astir decidedly accelerate nan maturation of nan segment. The company's accrued beingness successful nan US pinch nan recently established Canon Healthcare USA will person awesome synergies pinch already established Canon Medical Systems USA. We will spot nan results of this move successful nan adjacent twelvemonth aliases so.

The institution is not conscionable sitting around. I tin spot that they are trying to found themselves arsenic a leader successful galore segments, which tin only beryllium bully for existent and early shareholders.

Financials

Let's person a look nether nan hood astatine really nan institution has been performing complete nan past 5 years and really patient nan books are.

First things first, let's person a look astatine nan margins. Gross margins person been hovering astir 44% to 46% for nan past 5 years, which whitethorn not look nan best, but it each depends connected nan manufacture and erstwhile comparing to its competitors for illustration HP Inc (HPQ) and Epson (OTCPK:SEKEF), Canon is simply a leader.

Gross Margin of Canon against comps (Seeking Alpha)

EBITDA margins are besides rather healthy, and nan institution is starring against its competitors also.

Gross and EBITDA margins of Canon (Own Calculations)

EBITDA of Canon vs Comps (Seeking Alpha)

The adjacent point that is important for my finance is nan rate ratio. Here nan institution gets an X because it cannot screen its existent liabilities pinch rate connected hand. That does not mean they would person liquidity problems, but conscionable to beryllium much scrutinizing I ever for illustration companies that person plentifulness of rate connected manus to screen their short-term obligations.

Cash Ratio (Own Calculations)

The company's existent ratio is acceptable but connected nan little end. Companies pinch a existent ratio of 2 are what I for illustration to see, however, Canon's is still sufficient. From nan chart below, we tin spot that nan ratio is going down slightly, but let's dream that it is not a inclination and that things commencement to move around. The institution is averaging 1.76 complete nan past 5 years.

Current Ratio (Own Calculations)

The indebtedness levels are beautiful overmuch non-existent connected nan latest report. Sitting hardly astatine astir 2.4B yen, which amounts to astir $18m. I for illustration companies that don't return connected excessive indebtedness to tally their day-to-day business, but also, I'm not saying that indebtedness is bad, I conscionable for illustration companies that person small debt. For example, I did an article connected Crocs Inc. (CROX) precocious and they person rather a spot of debt, however, this benignant of indebtedness is not worrisome to maine because they are actively paying it down and nan acquisition was a smart move.

Return connected invested superior is simply a spot of a mixed container and is simply a spot little than what I would usually consider, however, it tin beryllium overmuch worse. The aforesaid goes for ROA and ROE. With clip I would for illustration these metrics to amended arsenic nan trends for nan past years propose below.

ROIC (Own Calculations )

ROA and ROE (Own Calculations)

From looking astatine nan supra metrics and nan full equilibrium sheet, nan institution is not doing badly, however, it could execute overmuch better. With expanding maturation prospects, I would expect these numbers to amended successful nan adjacent 5 years.

Valuation

Considering nan imaginable maturation prospects, wide awesome financial results successful 2022, and affirmative outlook, I do not want to beryllium excessively influenced by each of these and would instrumentality to my blimpish maturation assumptions. I person gathered each nan financial info for nan past 10 years successful USD alternatively of JPY arsenic astir of nan investors present would beryllium trading successful this currency. The US Dollar complete nan past while has appreciated rather a spot against nan JPY truthful gross maturation y-o-y does not construe to nan aforesaid number successful USD. At nan opening of 2022, JPY was worthy astir 115 per USD, since past USD appreciated by astir 15%, which intends that those awesome gross numbers successful JPY (around 15% for nan year), fundamentally extremity up being 0% successful USD. USD reached 150 astatine 1 constituent but retreated recently. I presume 2% maturation complete nan adjacent 10 years successful USD for gross maturation arsenic I judge since nan dollar has already retreated 15% from its highest it whitethorn proceed and settee down backmost to wherever it was a fewer years back, astir nan 105 to 110 range.

On a much blimpish case, I person maturation sitting astatine 1%, and connected a much optimistic case, astatine 3%. I judge these are very blimpish numbers, furthermore, to person moreover security, I added a 25% separator of information to nan last DCF valuation.

After inputting my assumptions into nan exemplary and getting a value scope for nan company, I tin reason that astatine these levels nan institution has a 21% upside pinch an implied stock value of 26.11.

10-year DCF (Own Calculations)

Closing Remarks

With nan supra financials, maturation prospects, and DCF valuation, nan institution looks charismatic astatine nan levels, however, does that mean they are going to reward their shareholders successful nan future? It is difficult to tell, but what nan study tells maine is that it is reasonable to presume that it could. On nan different hand, if we spell and look astatine really it has rewarded its shareholders successful nan past, we tin spot that location person been amended companies to put successful complete nan aforesaid period. With nan caller announcement that nan institution intends to delist its ADR from nan NYSE, it could go a spot much cumbersome to waste and acquisition nan stock, however, ADR will still beryllium disposable connected nan OTC markets aliases investors tin waste and acquisition it consecutive disconnected nan Japanese speech pinch ticker JP7751.

Returns compared to SPY (Seeking Alpha)

Take nan supra study pinch a atom of salt, and make judge to do your owed diligence erstwhile looking into whether you would for illustration to adhd nan institution to your portfolio. In my opinion, it is simply a bargain correct now from what I tin see, and americium considering starting a position wrong nan adjacent half a year.

MSc successful Finance. Interested successful investing since nan property of 17. Long-term sky investor mostly pinch 5-10 twelvemonth horizon. Eager to amended my equity investigation skills. I judge a portfolio should dwell of a operation of growth, value, and dividend-paying stocks and besides immoderate hedging done immoderate blase options plays from clip to time.