Casio Earnings: Solid Watch and Calculator Sales Offset Weakness of Musical Instruments

We maintain Casio Computer’s 6952 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.

Revenue in the timepieces segment rose 4.4% year over year, up 0.5% on a currency-neutral basis, with a 10.8% price increase offsetting a 9.6% volume decline. We believe that the price increase is evidence of G-Shock’s pricing power and is in line with the company’s strategy to improve its product mix by leveraging its brand. It is also encouraging that domestic sales increased 15% from the previous year due to the recovery of inbound sales, driven by the recovery in tourism. Sales in China grew by 8% with the progress of channel inventory correction.

Revenue in the consumer segment was up 1.2% year on year as 14% growth in calculators was largely offset by a 21% decline in sales of musical instruments. Although it is difficult to achieve the company’s guidance for musical instruments revenue (negative 1% year on year), robust sales of scientific calculators have improved the product mix and as a result, we expect the segment’s operating margin for the year to exceed the company’s guidance of 4.1%.