Eyeing Up A Long Play In Canon (NYSE:CAJ)

Canon, Inc. (NYSE:CAJ) came across a screener we ran where the objective was to find stocks:

  1. Trading under book value.
  2. Profitable.
  3. Paid a viable dividend.

As we can see from the long-term chart below, shares of Canon have been making lower lows for almost three years now. In fact, it will be interesting to see if price holds up at this level as price is more or less trading at the company’s 2008 lows. If we break through $16 a share to the downside, we also see that shares have meaningful support at the $15 level.

Being chartists, we believe that every possible fundamental such as languishing pandemic-related sales of office products, cameras and medical equipment have already been digested by the share price. There are a few things to point out with respect to Canon’s long-term chart.

  • Firstly, there is every possibility that the long-term, multi-year, double-top pattern has now run its course (completed). We state this because shares have come right back down to test the 2008 lows and thus far have held support.
  • Technical analysis follows the pretense that history repeats itself. Although we are nowhere near a long-term buying signal (Histogram has not crossed over into bullish territory), we believe that Canon could offer a similar buying opportunity to what we had in 2008.

Therefore, a viable strategy in here at present would be something like a covered call if there was ample liquidity as this would reduce the risk somewhat on the trade as cost-basis could be reduced down to the significant support zone around the $15 level.

Canon though is obviously cheap for a reason. Shares are presently trading with a book multiple of 0.73 and a sales multiple of 0.57. These numbers are ultra-low especially when compared to the average valuations in this sector.

To really get a handle on how fundamentally strong Canon is at present, we like to look at how the key dividend metrics have been trending. What the firm definitely has going for it is it is still expected to do approximately $0.44 in EPS this year. We acknowledge that the company reported a very rare loss in the most recent second quarter, but earnings are expected to bounce back into the black in Q3.

Despite the decision to cut the dividend, Canon’s forward yield still comes in at over 4.5% based off the current share price. Many investors due to the dire share-price performance thus far in 2020 along with the announced dividend cut may prefer to steer clear of Canon. However, it is at precisely these times (when sentiment is dire) that invariably bring the best buying opportunities.

The dividend for example continues to be covered by free cash flow despite the severe fall-off in earnings this year. There is no doubt that the company’s 10-year trends for example are weak. Both gross margins as well as operating margins continue to decline. Margin declines have resulted in net profit being down approximately 6% on average over the past three years. Suffice it to say, Canon was not in the best of shape coming into fiscal 2020.

However, as we all know, the stock market is all about risk/reward. Canon despite its failings at present is still generating cash flow (P/C of 4.8), is profitable, is trading well below book value, and shares are ultra-cheap. Whenever these conditions exist, the probability of a successful long investment automatically increases. Why? Because if the net worth of the firm can remain stable if not increase during the bad times, the firm’s assets over time should bear fruit for the company in the long haul.

Despite the drop in EBIT over the past few years, the company’s interest coverage ratio remains well over 140, which means the majority of the company’s operating income can continue to drop to the bottom line. The debt-to-equity ratio remained very low at only 0.17 in the most recent quarter. Suffice it to say, we do not see any further risk to the dividend at this present moment in time.

To sum up, Canon has all the hallmarks of an attractive value play. When one includes its strong equity position, its profitability, the dividend and its valuation, there is a lot to like here for the patient investor. Furthermore, as discussed above, we believe the technicals are demonstrating minimal downside risk at present. Let’s see what the third quarter brings.


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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CAJ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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