A Look at Canon's Earnings and Guidance (CAJ)

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Canon Inc. (NYSE:CAJ), recorded a 16.3% increase in Q1 y-o-y net income setting a new record and raised its guidance for the current fiscal year based on lower expected COGS as it simultaneously targets higher margin product sales. Canon reported an EPS of 121.98 yen for the quarter (US$1.04) against 104.93 yen (US$0.89) in the same quarter last year.

Japanese traders sent Canon (Tokyo: 7751) shares lower by 0.7% prior to its after hours earnings release Thursday in Tokyo. Canon's ADRs somewhat surprisingly traded lower (-0.84% at $73.53 close) on par with its normal trading volume, most likely because earnings/guidance were not as stellar as expected despite beating consensus/prior estimates, the strong gains already made this year, and the fact that its ordinary shares traded lower in Japan. There is a good possibility nonetheless that its ordinary shares will trade higher Friday in Japan based on the overall positive earnings and guidance, which in turn could influence trading of its ADRs.

Canon increased sales by 9.5% y-o-y and is projecting a 10.3% increase for the full year ending Dec. 31, 2006. Operating profit increased y-o-y by 18.7% and is expected to grow by 17.7% for the year ending Dec. 31. Canon is expecting a smaller gain in net income for the full year, 12.5%, versus the 16.3% increase in Q1 y-o-y.

Notes from Canon's "2006 First Quarter in Review"

As for the markets in which the Canon Group operates, within the camera segment demand for digital single-lens-reflex cameras and compact digital cameras continued to realize healthy growth in overseas markets during the term. Within the office imaging product market, demand for network digital multifunction devices (MFDs) remained solid amid the shift toward color models and advanced functionality. For sales of computer peripherals, including printers, while demand for laser beam printers grew for color models, and a shift in demand was present from single-function printers to multifunctional models for inkjet printers, the segment suffered amid severe price competition. In the optical equipment segment, while demand for steppers, used in the production of semiconductors, has entered a recovery phase, the market for projection aligners, which are used to produce liquid crystal display panels, declined due to restrained investment by LCD manufacturers.

Notes from Canon's "Outlook"

In the businesses in which Canon is involved, demand for digital SLR cameras is expected to continue enjoying robust growth primarily in overseas markets. As for network digital MFDs and laser beam printers, while additional demand is projected for full-color models, severe price competition and shifting demand toward lower-priced models are expected to continue. Within the semiconductor-production equipment market, demand for steppers indicates a trend toward moderate recovery, supported by increased investment by chip manufacturers. In the market for projection aligners used in the production of LCD panels, demand is expected to decline due to restrained investment by LCD manufacturers.

I am slightly concerned with Canon's assumed currency exchange rate of 117 yen to USD. We have already seen a strong move by the yen that has put the rate in the 114s. Should the Fed not increase rates in May and the BoJ begin its incremental rate hike, it is expected that the yen will strengthen further. This is a potential negative surprise for Canon's earnings unless it can overcome a lower FOREX conversion profit by boosting sales volumes.

Notes from Canon's "Results by Product Segment"

The gross profit ratio for the camera segment also rose substantially, boosted by such factors as favorable sales in high value-added products, including newly introduced products, and cost-reduction efforts realized through production-reform and procurement-reform activities. As a result, operating profit for the camera segment increased by 84.9% year on year to ¥44.0 billion (U.S.$376 million).

Click here for a quick summary of Canon's Q1 earnings and click here for the detailed version in PDF format that also contains the notes by Canon above.

CAJ 1-yr chart as of 04/27 market close

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Tagged: , Photographic Equipment & Supplies, Japan
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