CANON PROFITS RISES AS IT NAMES NEW CHIEF

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Profit rises at Canon as it names new chief
TOKYO Canon, the world’s biggest digital camera maker, said Monday that its profit rose 34 percent in the fourth quarter of 2005 on sales of new models and a weaker yen.
The company also forecast a seventh year of record profit and named Tsuneji Uchida as its next chief executive to spearhead an entry into the $85 billion flat-panel display market.
Uchida, who heads Canon’s camera and display businesses, will take over a company that increased its net income sevenfold since 1995 under the chief executive Fujio Mitarai, who is due to become chairman in March.
Uchida, 64, was promoted to senior vice president, ranking him second to Mitarai. Mitarai, 70, will become chairman of the Keidanren, the main Japanese business lobbying group, in May.
Canon is developing a screen technology with Toshiba that generates clearer pictures and consumes less power than plasma and liquid-crystal panels.
In the fourth quarter, net income rose to ¥108.2 billion, or $930 million, from ¥80.8 billion a year earlier. The median forecast made by analysts in a survey was ¥114 billion.
Sales rose 14 percent, to ¥1.1 trillion, while operating profit rose 28 percent, to ¥169.3 billion.
For the full calendar year, the company reported a 12 percent increase in net income, to a record ¥384.1 billion, on sales of ¥3.75 trillion. Operating profit rose 7.2 percent, to ¥583 billion.
The company’s camera unit had a fourth-quarter operating profit of ¥63 billion, a 59 percent increase from a year earlier. Sales rose 18 percent, to ¥296.9 billion.
“Canon’s cameras are doing surprisingly well despite an industrywide price slump,” Taiji Yoshida, a fund manager at Yasuda Asset Management in Tokyo, said before the earnings report was released. “They are committed to keeping up margins.”
Operating profit at its office equipment division, Canon’s biggest business, rose 13 percent, to ¥150.2 billion, in the quarter. Sales gained 6.2 percent, to ¥707 billion.Canon makes 70 percent of its sales from office equipment.
“What pulled us back in the fourth quarter was office equipment,” said Toshizo Tanaka, the executive in charge of finances. The markets for color copiers and for inkjet printers, he said, faced greater-than-expected competition, especially on prices for inkjet printers.
To try to combat falling prices, Canon is introducing more color models that can also copy and scan.
For 2006, Canon predicts operating profit of ¥653 billion on sales of ¥4.06 trillion. Mitarai has set Canon a sales target of $50 billion for 2010, to be driven by the display business and acquisitions.
The company expects to ship 19.2 million digital cameras this year, including 2.2 million SLR units. Canon sold 16.9 million digital cameras, including 1.9 million SLR models in 2005.
Canon said operating profit from its optical products rose 148 percent, to ¥8.55 billion, in the fourth quarter. Sales gained 59 percent, to ¥160.4 billion.
Shares of Canon rose 0.4 percent to ¥7,190 Monday in Tokyo. The company announced earnings after the markets had closed. In the fourth quarter, the stock gained 13 percent, compared with a 17 percent gain in the broad market indicator.

Canon looks beyond quarterly projections
Digital technology is driving rapid changes in the way people capture and duplicate images.
Consider digital cameras.
Just a year ago, only 26% of all households had them in Western European – the world’s largest digital camera market, according to a report released in September by Weymouth, Mass.-based InfoTrends / CAP Ventures.
That number should increase to 39% of all Western European households by the end of this year, according to the market research and consulting firm’s report.
Along with those digital camera purchases come new ways to electronically transmit and print images. That creates opportunities and challenges for companies selling peripheral products and services like film and photo processing, and other imaging technologies.
One local analyst says a good way to sort through which companies will have more opportunities than challenges is to evaluate their research and development spending.
“It’s all about planting the seeds for long-term growth,” said Rob Helf, a research analyst at Fiduciary Management Inc. in Milwaukee.
When Helf surveys the landscape of business / consumer imaging companies, he sees giants like Palo Alto, Calif.-based Hewlett-Packard Co., Armonk, N.Y.-based International Business Machines Corp., Tokyo-based Sony Corp., and Stamford, Conn.-based Xerox Corp.
But he lands on another company he says he thinks will drive more innovation in the rapidly changing world of digital imaging.
Canon Inc. (CAJ, $59.44), based in Tokyo, spends about 8% of its revenue on research and development, Helf said. Hewlett-Packard spends about 7% of its revenue on R&D, and the rest of those companies spend 4% to 6%, he said.
“Most companies think about performance of revenues and earnings over the next quarter or the next year, but this company manages its business for the next decade,” Helf said. “Canon doesn’t back away from continuing to spend and take costs out in other places.”
The company was awarded 1,800 U.S. patents in 2004, and has received more than 17,000 U.S. patents since 1995, making it second only to IBM in U.S. patent volume during that period, he said.
Fujio Mitarai, Canon’s president and chief executive officer, is constantly discussing in quarterly and annual reports and other communications with shareholders, how the company will spend its money and take costs out, Helf said.
Business success
About two-thirds of Canon’s revenue and operating income comes from its business machines segment, which sells about equal amounts of office copying equipment and computer peripherals like laser printers.
Both businesses have what Helf calls a “razor blade” model, where they generate a lot of business after the initial purchase through sales of supplies like toner and ink.
Cameras make up another 25% of Canon’s business. The company has continued its focus on high-end products and has maintained strong market share as the lower-end camera sellers have begun to sift out, Helf said. Canon is one of the top digital camera producers in the world, with more than a 20% share of the worldwide market, he said.
Canon is developing, through a joint venture with Toshiba, a television that uses SED technology for the high-definition TV market, Helf said. The hope is that SED, or “surface-conduction, electron-emitter display” technology will be able to produce vivid color images with lower power consumption, he said.
The company uses production cells rather than assembly lines, he said. Each group of workers in a production cell can develop specialized knowledge. And because of the streamlined communication, Canon’s management says it’s easier to figure out how to take out production costs.
Canon has about $8 billion, or $9 a share, of cash on its books. Investors get the comfort of that cash cushion and a relatively cheap stock that’s selling at roughly 12 times 2006 earnings on the share price minus that cash, Helf said.
The company also on Wednesday boosted its dividend to about 83 cents a share from about 54 cents, showing that management anticipates healthy earnings and cash flow in coming years, he said.
Canon trades on the New York Stock Exchange as an American Depository Receipt, or ADR. Each Canon ADR that trades in the U.S. represents one Canon share that trades on the Tokyo stock exchange. ADR holders are entitled to dividends and capital gains associated with the related shares that trade on the Tokyo Exchange
Possible risk
The biggest risks Helf associates with Canon shares are the possibility its growth will slow along with digital camera purchases, and the chance that a big customer will go elsewhere. Canon currently gets about 20% of its revenue from making laser printers that Hewlett-Packard sells under its name.
“That could be disruptive but it would be a big risk right now for Hewlett-Packard to change its business strategy abruptly,” Helf said.
Helf’s firm began buying Canon shares in late 2004 in its FMI Large Cap Fund and clients’ big company stock portfolios, and is still buying selectively for new accounts. Canon’s share price is likely rising now because of anticipation the holidays will bring big digital camera sales. Helf would buy up to $58 a share and says these shares could go as high as $70 in the next 12 months

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January 31, 2006 at 11:24 AM