Canon (TSE:7751): Exploring Valuation After Recent 6% Stock Climb

Canon (TSE:7751) has attracted attention as its stock climbed around 6% over the past week. The move comes despite the absence of a clear news event, prompting a fresh look at the company’s recent market performance and valuation.

See our latest analysis for Canon.

Canon’s 6% share price gain over the past week stands out, especially within the context of a choppy year for the tech sector. While short-term momentum appears to be building, the bigger story is its impressive 57% total shareholder return over three years. This suggests that long-term investors have seen strong rewards despite recent turbulence.

If you’re watching Canon’s momentum and want to see what else is gaining traction, now is the perfect time to discover See the full list for free.

With the stock trading below some analyst price targets and delivering steady financial growth, the central question for investors is whether Canon remains undervalued or if the market is already factoring in all potential upside.

Price-to-Earnings of 24x: Is it justified?

Canon is currently trading at a price-to-earnings (P/E) ratio of 24, which signals that the market is paying a premium for its shares compared to both peers and the broader industry. With the last close at ¥4,529, investors are valuing Canon’s earnings higher than those of many similar tech companies in Japan.

The P/E ratio is a simple yet powerful valuation metric. It shows how much investors are willing to pay for each unit of the company’s earnings. In tech, it is often used to gauge expected growth or market optimism about future profitability. For Canon, a higher P/E could reflect recent profit momentum or hopes that earnings will rebound after a challenging year.

Despite the premium, Canon's P/E sits above the industry average of 15x and is also higher than its estimated fair price-to-earnings ratio of 22.9x. This premium suggests that expectations for growth or recovery are fueling a higher valuation. The level could moderate if earnings do not accelerate as hoped. The fair ratio indicates the market may have moved a bit ahead of current earnings strength.

Explore the SWS fair ratio for Canon

Result: Price-to-Earnings of 24x (OVERVALUED)

However, recent annual share declines and only modest revenue growth suggest Canon could face pressure if market optimism fades or if earnings momentum slows.

Find out about the key risks to this Canon narrative.

Another View: Discounted Cash Flow Perspective

While the current price-to-earnings ratio makes Canon look expensive, our SWS DCF model offers a very different story. The DCF suggests Canon is trading about 30% below its estimated fair value, which highlights a potentially significant undervaluation that the market may be ignoring. Is the real value hidden beneath headline multiples?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Canon for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Canon Narrative

If you want to dig deeper or come to your own conclusions, you can assemble your own analysis in just a few minutes, and Do it your way.

A great starting point for your Canon research is our analysis highlighting 2 key rewards and 3 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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