3 Business Equipment Companies That Seem Equipped to Succeed

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Businesses around the world will continue to demand considerable volumes of commercial and office supplies, at least in the foreseeable future. Avery Dennison (NYSE: AVY), Canon (NYSE: CAJ), and Xerox (NYSE: XRX) are three industry leading companies particularly poised to benefit from the recuperating economy and the resulting increase in demand for business supplies worldwide. Let’s take a closer look at them in order to check if they stand as good long-term investments.

Avery Dennison: Not so pressure-sensitive

Avery Dennison produces and distributes pressure-sensitive adhesives and materials and other related office and commercial products, like tags and labels, in more than 60 countries. Recently, the company has been undergoing a wide restructuring that is expected to deliver annualized savings of more than $100 million by mid-fiscal-year. Given the opportunities created by this reorganization, analysts expect the firm to deliver an average annual EPS growth rate of around 14% for the next five years. Poised to outperform its peers and having beat estimates last quarter, is this stock a buy?

Management’s long-standing efforts to build a strong brand name and important operations in emerging markets have proven highly profitable in the past. Currently, these markets account for about a third of Avery Dennison´s Pressure Sensitive Materials (PSM) segment’s revenue and for one-fourth of its Retail Branding and Information Solutions (RBIS) segment’s sales. Going forward, emerging economies should drive growth and contribute to margins in the long-term while helping the firm weather the weakness in developed countries.

Strongly committed with its long-run targets, which include an EPS growth in the 15%-20% range by 2015, management agreed to divest some of its struggling segments and put a strong focus on productivity improvements. Although an attractive investment opportunity, the stock trades at 22.8 times its earnings, surpassing the industry average valuation by 47%. So, you will have to pay a premium if you want to hold this stock.

A Canon in the imaging sector

Canon is a worldwide leading company in the professional and consumer imaging equipment and information systems industries. With a wide product portfolio, strong international presence, and an established brand name, this is a firm you will want to watch. Expected to deliver annual EPS growth rates above 18% in average over the next five years, this is a stock to buy. Trading at 13 times consensus earnings, about a 35% discount to its peers, now looks like a good time to acquire a portion of this company.

Although Canon’s margins were hit by the last recession and the appreciation of the Yen, its management has been focusing its efforts on shifting away from its Japan-based model by opening plants and offices in other countries. By geographically diversifying its operations, the company should prove more resilient to currency fluctuations, especially to the Yen appreciation, which makes its products more expensive than its non-Japanese competitors’.

Going forward, Canon should benefit not only from its dominant position in the office equipment segment, but also from its leading spot in the digital cameras segment. This last business provides the firm with a sticky client base that usually remain loyal to Canon cameras, mainly due to the fact that interchangeable lenses (which are quite expensive and highly appreciated by digital single-lens reflex camera users) are usually not compatible between brands. These provide the firm with a considerable moat that will help it keep competitors at bay and its business profitable.

When a brand-name becomes a verb

Xerox is not only the action of photocopying an image or text, but also the name of a long-standing industry-leading brand that provides business process and document management solutions. Although its printing hardware segment can still provide strong returns, its services segment seems to offer the most upside potential.

Its printing business has still got some upside to offer, mainly on the back of the migration from black and white printing to color pages. Moreover, the company is not only working to lower the costs per printed page while “developing the software tools needed to make shorter print runs more competitive, lowering setup costs and enabling customization. Xerox enjoys a long runway on converting traditional offset print jobs to digital processes.” (Morningstar)

However, it´s Xerox´s services segment that really catches my eye. Through important acquisitions and organic growth, the firm is widening its service offering portfolio. This segment continues to outperform its hardware segment not only in revenue, but also in growth. Going forward, services are expected to drive the company´s growth.

Trading at 9.6 times its earnings, about a 34% discount to the industry average, while offering compelling growth prospects and above average margins, this is a stock that you should consider adding to your portfolio.

Bottom line

Although all three companies above described offer compelling growth prospects at reasonable valuations, Canon would be my pick, on account of its balanced prospects-to-valuation ratio. Add this stock to your long-term portfolio and prepare to enjoy the upside provided by a company that holds one of the strongest brand names in the sector and leads various industries, from photography to printing.

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Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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