Aug 4, 2017 - NIKON Corp. Released their Q1 FY2018 results with little to cheer other than results exceeded previous weak forecasts. Restructuring is still.
Company Description
Nikon Corp. engages in the manufacture and sale of optical instruments. It operates through the following segments: Precision Equipment, Imaging Products, Healthcare, and Industrial Metrology and Others. The Precision Equipment segment covers products and services related to integrated circuit and l...
Nikon Corp. engages in the manufacture and sale of optical instruments. It operates through the following segments: Precision Equipment, Imaging Products, Healthcare, and Industrial Metrology and Others. The Precision Equipment segment covers products and services related to integrated circuit and liquid crystal display steppers. The Imaging Products segment manufactures and sells imaging products and peripherals such as digital single-lens reflex cameras, compact digital cameras, and interchangeable camera lenses. The Healthcare segment offers microscopes, measuring, and inspection equipment. The Industrial Metrology and Others segment includes glass, ophthalmic lenses, multi-turn absolute encoder and customized products. The company was founded by Koyata Iwasaki on July 25, 1917 and is headquartered in Tokyo, Japan.
(Editor’s note: There is much greater volume on the Tokyo exchange under the symbol 7731:JP).
This is my reply to the buy recommendation for Nikon (OTCPK:NINOF) made by Citi Research analysts Yuta Nishiyama and Masahiro Shibano. I do not believe their thesis that Nikon has three growth catalysts in Flat Panel Display (FPD) lithography, SPE lithography equipment and imaging.
No disrespect intended but Mr. Shibano and Mr. Nishiyama are wrong to say that Nikon has growth potential in imaging. My fearless forecast is that Nikon will endure negative growth for its imaging products - cameras and lenses. The Citi Research analysts did not heed Japan-based CIPA's dire warning that camera unit sales will continue to drop this year. CIPA (Camera & Imaging Products Association) reported that there was a 20% drop in global camera sales.
I expect more than 20% annual drop for 2016. Please study CIPA's latest chart below for 2016 global camera shipments. Camera shipments are headed for another down year. I bet this downward trend will continue well beyond 2020.
(Source: CIPA.jp)
Better Smartphone Cameras Are Making Standalone Digital Cameras Redundant
Statista's chart below should further emphasize my long-term negative growth forecast for Nikon's imaging products. Digital camera sales started to rapidly drop in 2011 when smartphone sales started peaking up. Compare the two charts below from Statista.
(Source: Statista)
CIPA's annual estimates for 2016 is based only on January to July numbers. However, even if we double the 13 million estimate, we only come up with 26 million. This doubled-up figure is still lower than the 35.4 million cameras shipped out last year.
The decline of standalone digital camera products will only worsen from phone manufacturers building better photography-friendly iOS and Android smartphones. Samsung (OTC:SSNLF), Apple (NASDAQ:AAPL), Huawei, LG Electronics and Lenovo (OTCPK:LNVGY) are just some of the firms that recently released flagship smartphones with great cameras.
Camera makers like Nikon have a bleak future ahead of them when professional photographers like Austin Mann are praising the iPhone 7's cameras. Advances in Sony's (NYSE:SNE) mobile image sensors helped Apple build an iPhone that could take very sharp, almost pro-level, pictures like Mann's recent picture of an old woman in Rwanda.
Image Copyright Austinn Mann
Going forward, it won't be long before next-generation smartphones render bulky, expensive DSLR (Digital Single Lens Reflex) cameras as small niche tools for high-end photography projects. Mann already demonstrated that using a tripod and good lighting will make high-end smartphones (like the iPhone 7, Galaxy S7 Edge, and Huawei P9) good enough even in paid photography gigs like real estate photos, commercial portraiture, wedding, and birthday events.
Yole Development's infographic below describes the smartphone's existential threat to standalone digital cameras and camcorders.
(Source: Yole Development)
The predicament of stand-alone camera makers like Nikon is even more dire when we take into account that sub-$200 Android phones like the Lenovo Vibe Shot can take great pictures. The $100 Alcatel Flash 2's rear camera, which is equipped with a 16-megapixel Samsung ISOCELL image sensor, is also praised for its excellent camera quality.
Nikon's future growth in imaging products sales is really bleak when people can have $100 Android phones that produce great photographs.
Nikon Is Very Vulnerable To Declining Camera Sales
Even though imaging products only account for 33% of Canon's (NYSE:CAJ) revenue, I still made three go-short recommendations for CAJ. This was largely due to the continuous drop in annual camera sales. Nikon gets more than 63% of its annual revenue from imaging products. Nikon is, therefore, more vulnerable than Canon to declining camera sales. Nikon's stock rightfully deserves a Sell rating from me too.
(Source: Nikon.com)
Study the Nikon financials chart above, the Imaging Products segment's revenue has consistently declined for three consecutive years. This obviously coincided with the rapid decline in global camera shipments.
Unlike Canon, Nikon has no multi-billion printer-related business (55.5% of Canon's 2015 revenue of ¥2,110.8 billion) that can help it make up for the continuing drop in camera sales. Unlike Nikon, Canon judiciously spent $6.5 billion to acquire Toshiba Medical earlier this year.
A check on Hoovers told me that Nikon has more than $2.3 billion in cash & equivalents. Camera vendors Canon and FUJIFILM (OTCPK:FUJIY) did but Nikon did not bid for Toshiba Medical. Nikon spent $400 million to buy medical device maker Optus last year. I expected Nikon to try buying Toshiba Medical.
Canon won Toshiba Medical and is now therefore less vulnerable to declining camera sales. Toshiba Medical had FY 2014 revenue of 279,967 million yen (around $2.77 billion).
Expanding To Sports Action Cameras Is A Blunder
I was hoping that Nikon would unveil its rumored full frame mirrorless camera at Photokina 2016. Sadly, Nikon only revealed new action cameras. This is an awkward expansion move for Nikon. Cheap copycat products already inspired action camera sales leader GoPro (NASDAQ:GPRO) to expand its business to drones. Nikon's three new KeyMission action cameras (which will retail for $280, $400 and $500) are not going to help reverse the declining revenue stream of its Imaging Products segment. Chinese firms like Xiaomi are already selling sub-$100 Yi action cameras. SJCAM is another Chinese firm that makes very affordable alternatives to GoPro's high-end action cameras.
Nikon's KeyMission action cameras are well-dressed but late attendees to the action camera party. It's already a crowded affair that it is not going to boost the Imaging Products segment's declining revenue stream. Nikon probably got inspired by Tractica's prediction that wearable cameras (like sports action cameras) will sell 24 million units by 2021. Nikon failed to appreciate Tractica's note that it will be low-priced Chinese action cameras that will likely benefit most from rising popularity of action cameras.
Unless Nikon is willing to match the sub-$100 pricing of Xiaomi and SJCAM's action cameras, KeyMission products are only going to appeal to a very small niche of customers.
Chinese Firms Also Threaten Sales of Nikon Cameras And Lenses
Like Canon, Nikon has long profited from selling pricey DSLR cameras and proprietary expensive lenses. Unfortunately, Chinese companies like Xiaomi, Yongnuo and Meike are going to do great business selling much-cheaper cameras, flashguns and lenses to Nikon and Canon fans.
Xiaomi, the world-famous vendor of sub-$400 iPhone-looking Android smartphones, has branched out to selling sub-$400 interchangeable-lens mirrorless camera. The Leica T-looking $330 Xiaomi Yi M1 mirrorless camera is one reason for photographers to ignore the new Nikon D3400 entry-level DSLR camera. Sony supplied the Xiaomi Yi M1 with its latest IMX269 camera image sensor. We can all expect it to produce pictures with great image quality.
The lighter, smaller mirrorless cameras from Sony, Olympus, Panasonic, are already hurting sales of DSLR cameras. Canon and Nikon still have not released a professional mirrorless camera. Consequently, high-end mirrorless cameras like the Sony A7R II will attract more pro photographers. Based on NPD Group's chart below, sales of mirrorless cameras surged while DSLR sales dropped for the past three years.
Xiaomi's release of a $330 mirrorless camera (that is compatible with more than 50 Micro Four Thirds lenses) will likely make the mirrorless format more popular. Prior to Xiaomi's entry, most mirrorless cameras retailed for more than $500.
Yongnuo, a Chinese firm whose early success was copying and selling cheaper copycat flashguns for Canon and Nikon DSLR cameras, has released prime lenses that are compatible with Nikon and Canon DSLR cameras. Meike is another Chinese company that sells lenses for mirrorless cameras. Kelda is another Chinese brand of cheap lenses for Nikon.
Nikon cannot expect to see a surge in sales of its pricey lenses now that Chinese firms market cheaper clones of Nikkor lenses. Yongnuo sells its Nikon-compatible f/1.8 50mm lens for just $89. Nikon's equivalent f/1.8 50mm Nikkor lens retails for more than $130. The Nikon-compatible Yongnuo f/2 35mm prime lens retails just for $92. The Nikkor f/2 35mm sells for $386.
FPD Lithography Depends On LCD Display Sales
I am also skeptical about Citi Research analysts' bullish outlook for FPD lithography products. Please refer to the Nikon chart below, Precision Equipment's five-year revenue performance is a rollercoaster adventure. Precision Equipment covers lithography-related products, and it only accounts for 22.7% of Nikon's annual revenue. Even if it produces 10% annual revenue growth rate, it will still not be enough to offset the emerging 8-9% drop rate in annual sales from imaging products.
(Source: Nikon.com)
Nikon's Flat Panel Display (FPD) lithography systems expose the switches that control the images displayed on LCD screens. This product segment is vulnerable to IHS' report of declining sales for flat panel LCD displays. Lithography products of Nikon are not going to post growing sales when tablets and PC sales continue to drop. Aside from TVs, laptops and desktop computers are the biggest market for LCD displays.
Conclusion
Nikon has several headwinds against it. It is prudent to not go long Nikon while it is still dependent on imaging products. Stand-alone camera sales will continue to suffer from the increasingly-better cameras of smartphones. Chinese-made action cameras, mirrorless cameras, flashguns and lenses are also lingering headwinds for Nikon Imaging Products' revenue stream.
NINOF's price has dropped more than 49% since January 2013. It is my fearless forecast that Nikon's stock will drop lower after CIPA reports its official 2016 camera shipments next year.
On a brighter note, Nikon's $2.3 billion in cash reserves could help it buy a company that could help it reduce its exposure (more than 63% share) on imaging products sales. Nikon was one of the firms that invested in 3D printing startup Carbon. I hope Nikon will spend more to diversify its revenue streams beyond the printing industry.
The camera industry also is not limited to selling stand-alone digital cameras. Nikon could build (or buy companies) that will help it profit from growing markets for camera systems in the fields of medical and surveillance industries. IC Insights' chart below reveals that there are other applications for Nikon's decades-old technology and expertise in imaging products.
Nikon could replace the dying sales of compact digital cameras by becoming a vendor of surveillance cameras. Markets and Markets' most recent report predicted that the global video surveillance industry will grow into a $71.28 billion market by 2022. The video surveillance market will have a CAGR of 16.56% from 2016 to 2022. Nikon should not miss this fast-growing opportunity in surveillance cameras.
Nikon has yet to release a security camera product. Its rival Sony already sells security cameras. Canon also sells its own brand of surveillance cameras.
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