Why Bill Fries is buying Canon’s stock


The manager of the $23 billion Thornburg International Value Fund thinks the electronics maker is primed for growth.

Fries, whose 7% annual returns over the past decade beat 97% of his peers’, was a longtime Canon shareholder. But he sold his stake in 2007, fearing that the global slowdown would lower enterprise spending.

Good call: The stock, sold in the U.S. as an ADR, fell 40% over the next two years. The Japanese tech company caught Fries’ attention again when it appeared on one of Thornburg’s value screens in late 2009. Fries began buying again in the spring of 2010 and has continued doing so — a million shares in total, at last count.

Even after a rebound, Fries thinks Canon’s growth prospects make it a good buy at 22 times trailing earnings: “I think it’s still valued at a point where there’s good upside.”

Printer sales are coming back

During the recession Canon’s (CAJ) profit margins fell from 10.6% to about 2%, says Fries. A key reason: reduced buying by Hewlett-Packard, its biggest customer. (Canon makes the printers that HP sells in the U.S.) “HP was very aggressive in getting inventory down,” says Fries.

Since then the tech giant has amped up purchases, he says, and Canon’s margins have bounced back to around 7%. Fries expects printer sales to stay strong as corporate customers, which delayed tech spending during the recession, start shopping again. “On a global basis, companies have the wherewithal to spend on office equipment,” he says.

People are buying pricier cameras

Canon is one of the biggest players in digital cameras, an area that Fries says is becoming increasingly lucrative as consumers step up to fancier models.

The advent of single lens reflex (SLR) digital cameras is paying off for Canon.

“We’ve had some change occur, and this was one of our specific reasons for optimism,” he says. High-end SLR lenses, says Fries (himself a photography hobbyist), can command $1,000; sales climbed about 30% last quarter, he says, citing analyst estimates.

Fries thinks cameras and lenses will continue to be a significant growth driver for Canon, which also sells expensive accessories for the cameras.

Global diversification pays off

Canon derives 31% of its sales from Europe. Given the continent’s recent woes, that could be grounds for concern — but Fries says fears of a European downturn are overstated. “The Europeans have surprised people. The Scandinavian and German economies are expanding, and they’re talking about 3% growth in Europe,” he says.

Canon will also do well, he adds, in emerging markets; countries other than those of Europe, Japan, and the U.S. constitute about 20% of Canon’s revenue. While many of the company’s high-end products are aspirational purchases, pocket-size digital cameras are doing well in the developing world, he says.

Canon has always been well run

Perhaps the biggest reason Fries expects Canon to outperform is the simplest: It’s a company with a track record of outstanding execution.

From 2000 through 2007, Canon’s annual return on equity more than doubled. And it has boosted its dividend 10-fold to about $1.20 per share. “It has a strong balance sheet, excellent free cash flow generation,” he says. “Those are things not typically associated with an out-of favor investment.” So far this year Canon has beaten earnings expectations in consecutive quarters, and Fries thinks the company can continue improving: Its return on equity, now about 8%, remains well below a high of 18% in 2007.

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