Another quarter, another set of impressive results from Canon (NYSE: CAJ). Since the 2000-2002 period, in which a brief recession followed the bursting of the tech bubble, Canon has experienced pretty smooth sailing.
This quarter was no different, with sales increasing 12.6% to cross the 1-trillion-yen mark ($8.8 billion) for the first time. From there, it only got better, as operating earnings rose 21.9% and earnings per diluted share grew 22.1% to 99.25 yen ($0.84) per share.
All of these results reflect growth rates exceeding the company's expectations for the quarter. Some of that came from a weaker-than-expected yen (119 to the dollar, instead of 117), but most of the gains are operational. This is readily apparent in the company's gross margins, which increased 58 basis points as new products fetched higher prices and the company continued cost-cutting efforts.
The business-machines segment is still the largest in absolute terms, but the biggest growth driver continues to be Canon's cameras. Sales in that segment increased 10.9% on a local currency basis, but operating profit increased 37%, and operating margins increased from 22.9% to 27.2% year over year. Sales of digital single-lens reflex (SLR) cameras are a major driver within the camera business; they make up 13% of units sold, but 37% of sales.
Canon has aggressively invested in capital expenditures for the last few years, creating free cash flow that trails net income. Nonetheless, the company still boasts roughly $9 billion in cash and nearly zero debt. This cash flow and balance-sheet strength have led to regular dividend increases. Canon has also started repurchasing its shares in the open market, in hopes of improving its return on equity.
I've owned Canon shares in the past, and given its operational strength, I'm always open to owning it again. I only fear that competitors Hewlett-Packard (NYSE: HPQ), Kodak (NYSE: EK), and Olympus (OTC BB: OCPNY.PK) will give the company a run for its money, eating away at price and margin. There's also a chance that sleeping giant Sony (NYSE: SNE) might get its house in order.
So far, Canon has managed to keep its foes at bay with a continuous stream of new, reliable products, allowing the company to maintain or even improve its margins, as it did this quarter. But given the overall risk and competitive nature of the electronics industry, I'd like a slightly larger margin of safety before I once again take aim with this Canon.
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At the time of publication, Nathan Parmelee had no financial position in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
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