Company Reports

Casio Computer’s June quarter operating income was JPY 4.5 billion, up 5% from the previous year and exceeding our expectations. This was due to a better-than-expected operating margin in the timepieces segment, driven by the weaker Japanese yen, overshadowing the operating loss in the music instruments and weaker-than-expected watch sales in China. Overall, we believe the reported numbers are not as good as they look, and there are some signs of weakness in the G-Shock brand and musical instruments. We remain more concerned about the lack of a medium-term strategy than the short-term earnings results. Nevertheless, we have a 4-star rating on Casio’s shares and believe the downside is limited, supported by the dividend yield of around 4%.

We are disappointed with Casio Computer's results for the March quarter, which indicate that its marketing activities in the watch business were not as effective as expected and that its music instruments business posted another large loss. In response to the disappointing results, the company has announced that it will embark on a major restructuring program that will include reducing its workforce and revising its marketing strategy, and as a result, Casio’s margin expansion will be delayed by about a year from what we had previously assumed. Accordingly, we lower Casio’s operating margin assumptions for fiscal 2024 (ending March 2025) and fiscal 2025 from 8.8% and 9.9% to 6.0% and 8.2%, respectively, and lower our fair value estimate for Casio from JPY 1,500 to JPY 1,450. We acknowledge that Casio’s problems, such as a slower response to unprofitable businesses and a poor track record of investing in new businesses, have not been resolved, and it will take some time for the market to regain confidence. However, despite the continued challenging fundamentals, we believe the downside in Casio’s stock price is limited, supported by its dividend yield of 3.9%.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

We have fine-tuned no-moat Casio Computer’s earnings forecasts and lowered our operating income forecast for fiscal 2023 (ending March 2024) to JPY 17 billion from JPY 18 billion, as we have lowered the sales forecast for the timepieces segment, and we expect a larger operating loss for the system equipment segment due to sluggish demand. Moreover, we added an impairment loss of JPY 2.5 billion for fiscal 2023, as we expect Casio to undertake further restructuring to turn around the system equipment business. Although we slightly lower our watch sales forecasts going forward, this will be largely offset by the cost-cutting effects of the restructuring, so we broadly maintain our earnings forecasts for fiscal 2024 and beyond.

We fine-tune our earnings forecasts for Casio Computer and maintain our fair value estimate of JPY 1,500. Casio's September quarter operating income of JPY 3.9 billion was down 26.6% year on year, but in line with our expectations as the company had previously stated that it would spend more on advertising expenses in the timepieces segment to accelerate promotional activities such as holding offline events. As a result, we believe that watch sales' momentum should improve in the second half of fiscal 2023 (ending March 2024), and the company can achieve its full-year operating income guidance of JPY 18 billion. With a dividend yield of 3.7% and an expected recovery in the next fiscal year, we believe Casio's shares are somewhat undervalued with limited downside. However, for the share price to continue to rise, Casio will need to improve the business structure of system equipment and music instruments, which are vulnerable to economic fluctuations, and continue to improve its watch sales, especially in China.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

We revise Casio Computer’s Morningstar Uncertainty Rating to Medium from High. We had assigned Casio a High Uncertainty Rating since October 2022 in response to a deteriorating operating margin in the music instrument business due to the economic slowdown and rising raw material prices, and a worse-than-expected margin in the timepieces segment due to the deteriorating product mix caused by the rapid slowdown in watch sales in China. However, we now have better visibility of the company’s earnings forecasts as the company is working on restructuring the music instrument business and watch sales in China have stabilized. In future, we expect Casio to maintain steady growth driven by solid sales of watches and calculators, and the rich cash flow generated by these businesses will allow the company to pay attractive dividends, which should support the share price. We maintain Casio’s operating income forecasts of JPY 18 billion and JPY 25 billion for fiscal 2023 (ending March 2024) and fiscal 2024, respectively, as well as Casio’s fair value estimate of JPY 1,500. We believe Casio’s shares are undervalued.

We maintain Casio Computer’s fair value estimate of JPY 1,500 based on the solid June-quarter results. Operating income for the quarter was JPY 4.3 billion, slightly above our forecast. Sales in the musical instrument business fell far short of the company's guidance due to deteriorating demand caused by inflation and the economic slowdown, but this was more than offset by strong sales of its mainstay watches and scientific calculators. As a result, we believe Casio is on track to meet our operating income forecast of JPY 18 billion, which is higher than the company’s guidance of JPY 16 billion. We maintain our view that Casio’s shares are undervalued as the market overlooks the solid cash flow generated by its lucrative businesses such as watches and calculators. Casio’s current dividend yield of 3.6% is attractive compared with most other tech hardware stocks.

We lower Casio Computer’s fair value estimate to JPY 1,500 from JPY 1,650, as we believe Casio’s fundamentals will take longer than expected to recover. In fiscal 2022 (ending March 2023), the music instrument business posted an operating loss for the first time in four years, due to the economic slowdown and soaring raw material prices, and sales of the system equipment business were also sluggish. In addition, the operating margin of Casio’s mainstay timepieces segment fell to 15.0% from 18.3% in fiscal 2021, due to the slowing sales in Japan and China, where profitability has been relatively high. As we believe the challenging environment will continue throughout this year, we have lowered our operating margin forecasts for fiscal 2023 and 2024 to 6.8% and 9.0% from 9.7% and 10.2%, respectively. Although Casio’s shares lack near-term catalysts, we believe the downside is limited, supported by the dividend yield of 3.6%, which is the highest in its historical range.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

Based on weaker demand and the change in currency assumptions, we have updated our earnings forecasts for three consumer electronics companies, revising Panasonic Holdings' fair value estimate to JPY 1,400 from JPY 1,450, and Casio Computer’s fair value estimate to JPY 1,650 from JPY 1,800. Sony Group’s fair value estimate per U.S. ADR is revised to $110 from $100 due to the stronger Japanese yen, while its fair value estimate per share is maintained at JPY 14,500. As indicated by the change in our fair value estimates, we believe that Casio is the most vulnerable to changes in the business environment, leading to the largest downward revision in its earnings forecast. On the other hand, Sony has been able to minimize the impact of the economic slowdown thanks to structural reforms implemented by current management. We believe that Sony is the most attractive of the three consumer electronics companies from a risk/reward perspective, although we believe that all three stocks are undervalued and have 20%-30% upside to their respective fair value estimates.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

Casio Computer has cut full-year operating income guidance for fiscal 2022 (ending March 2023) from JPY 27 billion to JPY 24 billion, primarily as a result of the outlook for lower watch sales in China. The company had expected the reduced restrictions to occur in the second half of this fiscal year, but the recovery seems to be much slower than anticipated. In addition, downward sales revision in the system equipment segment has contributed to the operating income cut. On the other hand, Casio’s full-year revenue guidance is slightly raised to JPY 275 billion from JPY 270 billion due to the weaker Japanese yen, but unlike other consumer electronics companies, the impact of the currency movement on Casio’s profits is limited.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

We revise our fair value estimate of no-moat Casio Computer to JPY 1,900 from JPY 2,000 for three major reasons. First, we cut the watch sales forecast in China as we incorporate the impact of restrictions and cancellation of marketing activities associated with the lockdown. Second, we cut our sales and operating margin assumptions for music instruments. The music instruments business has a relatively high revenue exposure in Europe, including Russia, and thus is the most heavily affected by the conflict. We also estimate that this business is mostly damaged by the increasing material costs. Third, we have lowered our revenue forecasts for the system equipment segment, due to the slower recovery of the domestic economy and slower progress in building up new business pillars. As a result, our operating income forecasts for fiscal 2022 (financial year ending March 2023) and 2023 (ending in March 2024) are revised to JPY 29 billion and JPY 35 billion from JPY 35 billion and JPY 39 billion, respectively.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

We cut no-moat Casio Computer’s fair value estimate to JPY 2,000 from JPY 2,100, as the recovery from coronavirus seems to be slower than anticipated. In the December quarter, watch sales in China dropped 28% from the previous year due to limited promotional activities and implemented restrictions and lockdowns. In the domestic market, the revenue of the system equipment segment did not recover as much as we had expected, and the progress of new businesses was slower than the company’s guidance. Casio Computer’s share price has dropped approximately 40% over the past year, due to the market’s disappointment with the slower recovery. However, we believe the downside to the current share price is limited. Historically, Casio’s share price has been supported by its rich cash flow earned from watches, and the current dividend yield of 3.4% has reached the upper end of its historical range over the past two decades. Hence, we believe that Casio’s shares are undervalued.

Casio Computer is a consumer electronic company that is focused on differentiating itself by selling niche devices at an affordable price. Casio established its identity by launching Casio Mini, known as the first personal calculator, in 1972; it replicated this success in 1995 with QV-10, the world’s first digital camera with an LCD display, and in 2002 with EX-S1, the first digital camera to achieve business-card size. Casio is also known for producing tough and functional wristwatches under the G-Shock brand name, which arrived in 1983.

Casio Computer’s September quarter results were broadly in line with our expectations, although they showed only slight progress from the June quarter. Mainly due to the weaker-than-expected consumer demand in China and the production disruption in Asia, watch sales for the quarter were sluggish. The impact of the pandemic on Casio is relatively large compared to other companies as more than half of its watch sales come from Asia, where the economic recovery from the pandemic has been relatively slower than other regions. Hence, we believe that the underperformance of the second quarter was because of one-time factors, and it does not affect our long-term view.