Strong Canon Laser Results Bode Well For H-P; Mixed For Lexmark

Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients suggesting Canon's (CAJ) recent strong laser results and outlook bode well for Hewlett-Packard's (HPQ) upcoming quarterly earnings release (Feb. 20).

• Canon’s strong laser results/outlook bode well for HPQ; results highlight challenging inkjet market dynamics. Canon’s Dec-qtr results highlighted several key takeaways relative to the printer market:

• Impressive laser results bode well for HPQ: In the laser business, where Canon supplies 100% of HPQ’s laser printer engines, Canon’s results were strong with unit growth acceleration from Sept. quarter (reported 35% growth vs. 26% in prior quarter). Canon saw color laser unit growth of 46% YoY driven by low-end models and robust mono laser growth of 34% from strength in emerging markets, translating to laser hardware growth of 35%. Further, Canon’s delivered 15% YoY growth in sales of toner cartridges (above 12% growth in Sept. quarter). Moreover, Canon issued solid forecasts for laser printers of 17% unit growth and 8% toner cartridge sales growth in FY07. As reference, HPQ’s laser business comprises over 50% of its printer sales and about 15% of total sales.

• Strong gains in inkjet All-in-Ones: Canon’s inkjet All-in-One units rose 53% YoY reflecting new product introductions and market share gains, and it is projecting 48% All-in-One unit growth in FY07 and 15% total inkjet unit growth.

• Cautious inkjet market commentary: While Canon’s total inkjet units grew 6% on strength in All-in-Ones, it reported sharp declines in single-function inkjets (down 15% YoY) and noted a smaller-than-expected market opportunity. Dell (DELL), Epson and Lexmark International (LXK) are all experiencing weak inkjet sales, partially as a result to de-emphasize low-end models.

Stock impact: positive for HPQ (should report strong laser results, although inkjet demand remains subdued); mixed for Lexmark International (continued inkjet share gains by Canon but LXK is focused on profitability).