Barclays Capital said Canon Inc.'s (NYSE: CAJ) outlook for 2011 seems like a positive sign for Hewlett-Packard Co.'s (NYSE: HPQ) laser printer business.
Canon’s first quarter laser sales and outlook indicated a relatively healthy market and were better than we expected. The outlook for 2011 seems like a positive sign for HP given that Canon can basically maintain its laser printer & toner expectations for the year, said Ben Reitzes, an analyst at Barclays Capital.
We believe Canon tends to provide a good read for HP’s laser printer business as HP sources all of its laser printer engines and toners from Canon and partners with Canon for certain copier/MFP sales and managed print services, said Reitzes.
Reitzes said laser printers and associated supplies account for about half of HP’s Imaging & Printing Group (IPG) revenue (the IPG unit accounts for about 20 percent of HP’s total revenue; 30 percent of total profits).
Canon reported calendar first quarter laser printer year-over-year unit growth of 44 percent (versus up 30 percent in fourth quarter) despite tougher compares (first quarter of 2010 units were up 131 percent year-over-year). Canon believes the laser market continues to expand at a steady rate even after the Japanese earthquake.
For 2011, Canon now expects laser unit growth of 16 percent year-over-year versus 17 percent previously. While a tad lower versus previous forecasts, Reitzes believes the laser printer guidance is actually a positive surprise given concerns around Canon’s overall production after the earthquake and tsunami in Japan. Note that his printer model currently calls for 8 percent year-over-year growth for laser units for 2011.
Canon also modestly adjusted its guide for laser consumables -- the company now expects laser consumables to grow 6 percent year-over-year in local currency versus 8 percent previously. Canon believes it has decent visibility on when production can get back to previous levels and therefore the company does not think supply to the market will be materially hindered.
Reitzes said he was concerned that Canon’s revisions to its laser printer division would be far worse, with negative implications for HP. However, it appears the quake-related revisions are all in copiers (he has thought at least some minor revisions would come in lasers).
Regarding copiers, Canon materially cut its fiscal 2011 unit outlook and now expects copier units to decline 2 percent year-over-year versus 15 percent year-over-year growth expected, previously, which includes 7 percent growth in color copiers (was up 32 percent) and a 6 percent decline in monochrome copiers (was up 8 percent).
Canon indicated that prior to the earthquake copier demand continued to gradually recover in all regions. However, the copier business sustained the biggest production damage in Japan (along with cameras) and given the trouble procuring parts, the company has lowered its unit forecast due to expected supply constraints. Also Reitzes noted that Canon’s proportion of copier sales is also high in Japan.
Canon also commented that it is not seeing any special pricing pressures -- especially in the copier space. Reitzes believes that the disruption at Canon could cushion Xerox’s share this year (especially in second quarter/third quarter of 2011) given what seems to be fewer production issues at Fuji Xerox (although he still expects some disruption).
For HP’s fiscal second quarter of 2011 (ends in April), Reitzes estimates IPG revenue growth of 4.2 percent year-over-year including commercial hardware revenue growth of 9.7 percent and supplies growth of 2.6 percent (including inkjets).
Note that Reitzes lowered his forecasts for HP’s Imaging and Printing business on March 28 to reflect modestly lower laser printer and toner revenue in second quarter and third quarter of 2011 due to potential shortages.
Given Canon’s better than expected commentary on availability for lasers and laser supplies, Reitzes remains quite comfortable with his top-line estimates for the IPG segment this quarter. For fiscal 2011, he estimates IPG revenue growth of 3 percent year-over-year including 5 percent year-over-year growth in commercial hardware and 1.5 percent year-over-year growth in supplies.
We believe Canon’s copier commentary has implications for Xerox Corp. (NYSE: XRX). The lower guidance for copiers in 2011 seems more earthquake related and not really a market issue. Canon actually issued a positive tone regarding overall copier demand into the earthquake and the basis of the lower guide seems to be production issues, said Reitzes.
Xerox reported on April 21 its first quarter earnings and did not change its full year profit guidance, indicating no material supply or component issues stemming from Japan. As a result, Xerox may be able to actually gain share globally as a result of Canon’s near-term copier constraints, said Reitzes.
HP stock closed Tuesday's regular trading up 0.39 percent at $40.69 on the NYSE, while Canon's American Depository Receipts closed Tuesday's trading up 1.29 percent at $43.24. Xerox stock closed Tuesday's trading up 0.50 percent at $10.08.