Keeping Fuji at Outperform

We maintain our Outperform recommendation on Fujifilm Holdings Corporation (FUJIY) based on its strong business and expansion strategy into wider marketswith innovative products. We believe this will provide greater momentum to the stock.

Fuji’s cost and expense reduction techniques and its acquisition strategy will boost both top-line and bottom-line results.

Fuji initiated cost and expense reduction techniques to improve its profitability. During fiscal 2010, the company recorded a 12% decrease in total cost and expenses. However, during the first half of fiscal 2011, it recorded a marginal 0.6% decrease in total expense.

Although the decrease was insignificant, the company is trying to curtail costs, which is encouraging. Moreover, new high-quality products at much reduced costs will prove profitable in future.

The company has been growing through acquisitions, especially in the medical imaging business. Recently, its Brazilian unit acquired NDT Comercial Ltda, a Sao Paulo-based provider of medical product sales services.

Some of its earlier acquisitions were Graphischer Dienst Diemer & Koch GmbH, a Bielefeld-based provider of graphic design services and the remaining interest in Fujinon Toshiba ES Systems Co Ltd, a marketer of medical equipment, from Toshiba Medical Systems Corp. The strategy to grow through acquisitions will bear fruit.

Fuji’s various structural reforms are yet another reason for its ADRs to outperform. Recently, the company introduced ROA-based indicators to improve efficiency of its asset and capital utilization by reducing fixed assets and inventories.

Management expects its ROA to more than double from 2.1% in fiscal 2010 to approximately 5.0% in fiscal 2012. ROE is expected to be 7.0% at the end of fiscal 2010. The restructuring programs would prove to be quite beneficial for the company in the long term considering the clear signs of recovery in each business segment.

Moreover, gradual market improvement is expected to have a significant positive impact on the operating results in the future. Thus, for fiscal 2011, management is expecting a 9% increase in revenue and expects the company to report operating income of $120 million from a loss of $42.1 million in fiscal 2010. The ADR currently retains its Zacks #2 Rank (short term Buy rating).

FUJI PHOTO FILM (FUJIY): Free Stock Analysis Report

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