According to recent economic data, the unemployment rate in the U.S. has slipped to its 5-year low, while disposable income is on the rise. The basic rule of economy says that when personal disposable income rises, sales of lifestyle-related commodities get a boost. This, coupled with increasing display resolutions, has bolstered camera sales of Nikon, Canon Inc. (ADR) (NYSE:CAJ) and Sony Corporation (ADR) (NYSE:SNE), and I believe that the good times will continue.
Leaders of the industry
Canon Inc. (ADR) (NYSE:CAJ) and Nikon are the front runners in DSLRs, or Digital Single Lens Reflex cameras, but Sony Corporation (ADR) (NYSE:SNE) is trying to catch up fast. According to the latest DSLR data available, Canon has around 45% market share while Nikon enjoys around 38%. The remaining 17% is mainly shared between Sony Corporation (ADR) (NYSE:SNE), Olympus, and Hasselblad, Leica.
To bridge the gap, Nikon and Canon Inc. (ADR) (NYSE:CAJ) recently launched their D5200 and 700D entry level DSLRs respectively. The good thing about these cameras is that they come equipped with advanced features, like 39 point AF system and discrete AF motors, which normally come equipped with high-end models that usually cost 1.5-2 times their price. This would not only lure new users, but even existing users would feel the urge to upgrade their cameras.
Furthermore, Canon Inc. (ADR) (NYSE:CAJ)’s upcoming EOS 100D is the world’s smallest DSLR, and has been strategically priced at just $649. This teaser price should attract beginner users and Canon can develop brand loyalty over a completely new segment of consumers.
It’s not a threat
Although smartphones are getting more imaging capabilities, their performance is still not at par with Canon Inc. (ADR) (NYSE:CAJ) and Nikon’s offerings. Despite 4k recording capabilities, smartphones are not capable enough to record at high ISOs, and optical effects like depth of field still remain a distant reality for them. But it cannot be denied that smartphones are convenient to use and have sensors capable enough for casual photography, which have hurt the sales of point and shoot cameras.
Canon’s management admitted that it wasn’t able to win the war against smartphones, and is expecting flat sales of its point and shoot category. But for FY13, management is expecting a 14% growth in net profit and 27% growth in operating profit. This suggests that management is counting DSLR sales growth, which bodes well with our investment thesis. For the recent quarter, Canon reported a 0.4% decline in quarterly profits, which was down mainly due to the strengthening Yen.
Even though Sony is venturing into DSLRs, it is more likely to remain in troubled waters. It is one of the less preferred brands in professional photography, and it is yet to prove its imaging capabilities. Furthermore, the availability and pricing of its interchangeable lenses has been detrimental to its adoption. In my opinion, Sony’s lack of competitive pricing and innovation in DSLRs should also hurt its profitability.
Besides cameras, Canon also manufacturers printers and provides printing solutions to large scale businesses. This somewhat hedges Canon’s risks and rewards, and eliminates the risk of sudden obsolescence. The company operates with little or no debt, and has $7.65 billion in cash and cash equivalents, which highlights its strong balance sheet. Shares of Canon appear to be undervalued with a forward P/E of 14.6, and analysts expect its EPS to grow 20.4% over the next year. Keeping the growth prospects in mind, I think Canon is a good stock to hold.
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