Canon Inc' CAJ

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Canon Inc. (CAJ)
By Dan Coyne Patrick Burgess Harry Wang Stephen
Kretz Wednesday, March 28, 2007
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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

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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

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Company Background
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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.

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Company Background
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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.

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ManagementCEO

• 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.

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ManagementCEO

• 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

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Industry Comparison
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Industry Comparison
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Basic Chart
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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

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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)

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DCF Discount Rate (RE)

• CAPM
• Risk-free rate (Rf) 5.38
• 10 year average 30-year T-Bond Yield
• Market risk premium (RmRf ) 5.30
• Based on historical average
• Beta (ß) 0.88
• Yahoo! Finance
• RE Rf ß(RmRf) 10.04

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DCF Contd
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Cons

• Management is getting old
• Company is somewhat secretive
• Highly competitive industry

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Pros

• DCF
• Cutting cost in comparison to major competitors
  Mitarais Way
• Industry comparison as a whole
• Ratio criteria
• Our figure in line with analysts estimates,
  within 0.15
• Jump in 2006 revenue
• Profit margin has been increasing over the past 5
  fiscal years
• All analysts say strong buy

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Our Recommendation

• BUY
• Reasons
• DCF
• Best of Breed (Comparison to
• Industry/History)
• Favorable Ratios
• Managements Proven Track Record