I’ve been looking at Canon (TSE: 7751 / NYSE: CAJ) recently and think it’s an interesting value opportunity that doesn’t get discussed much outside Japan.
The market is valuing Canon like a no-growth legacy hardware company.
Yet the stock trades at only ~10x forward earnings and ~6x forward EV/EBITDA while generating hundreds of billions of yen in annual operating cash flow.
Most investors still view Canon as a mature camera and printer company. While those businesses remain important, today’s Canon is substantially more diversified than that perception suggests.
The company is organized around four major segments: - Printing - Imaging - Medical - Industrial
(I like their recent corporate video for an overview: https://www.youtube.com/watch?v=2vkXbU_Hk2s)
What initially attracted me was the free cash flow profile. According to Canon’s FY2024 Annual Report, free cash flow increased from ¥175.8 billion in FY2023 to ¥309.5 billion in FY2024, a 76% increase year-over-year. For a company of Canon’s size and maturity, that’s a meaningful jump and suggests the underlying business may be healthier than the market gives it credit for. (Canon Global)
The diversification story is also interesting. Medical has become a significant business through Canon Medical Systems, which competes in CT, MRI, ultrasound, X-ray and healthcare IT. This is a much more attractive end market than traditional office printing and gives Canon exposure to long-term growth in medical imaging. (Canon Medical)
The Industrial segment is another underappreciated asset. Canon operates in semiconductor lithography, display manufacturing equipment and other industrial technologies. Management has spent years investing in these areas rather than simply harvesting the legacy printing franchise. (Canon(Japan))
One thing I like is that the thesis does not require a heroic growth assumption. There is a lot of discussion around Canon’s nanoimprint lithography technology. I do not own the stock because I think it will become another ASML. The probability of that outcome seems low. However, if nanoimprint lithography achieves meaningful commercial adoption, there could be substantial upside that is not reflected in the current valuation. I view this as optionality rather than the core thesis.
The core thesis is much simpler: - Strong and improving free cash flow - Diversified business mix - Exposure to medical imaging and industrial technology - Shareholder returns through dividends and buybacks - Valuation that appears low relative to profitability and cash generation
Risks obviously remain. Printing is still a large contributor to profits, some businesses are cyclical, and Canon has a long history of trading at low multiples.
My question for the sub: What am I missing? Why should a company generating over ¥300 billion in annual free cash flow, with meaningful positions in medical imaging and industrial technology, deserve such a modest valuation multiple?