Akzo Nobel in Transitional Phase

Akzo Nobel N.V. (AKZOY) is enhancing its global position in coatings through acquisitions and internal growth. The company sold its pharma business to Schering-Plough Corporation (SGP). Thus, Akzo Nobel is a core chemicals and coatings company.

The company acquired Imperial Chemical Industries PLC (ICI), a leading paints and specialty chemicals company. The proceeds from the sale of the pharmaceutical segment will enable the company to pursue its growth objective through meaningful acquisitions and will help in reducing pension and other legacy costs of the company. In 2007, ICI's sales were up 6% led by emerging markets, followed by a 27% rise in earnings before interest and taxes from continuing operations.

However, rising commodity costs are negatively affecting margins. The company is also facing a difficult environment in Europe. Increased R&D expenditures are another factor that will weigh on the stock's performance in the near term.

Currently, Akzo is trading at 13x our 2008 earnings estimate of $6.46 per ADR. Its continued efforts at cost control, aimed at offsetting the present economic challenges, make us believe that it deserves to trade at a higher P/E multiple. However, at this time we recommend investors to Hold the stock. Using our fiscal year 2008 earnings estimate, and a forward multiple of 12.7x, we reiterate our six-month target price of $82.

Lowered Outlook for Canon

Canon, Inc. (CAJ) is one of the world's leading designers, manufacturers and marketers of office equipment, cameras and optical products. The company's investment in digital cameras has given it an industry leadership position and has been a significant contributor to growth.

However, strong Yen appreciation have caused the company to lower its outlook for 2008 and pressures in developed nations pose further risks to sales. Management expects products contribution to be accelerated in the second half of the year, thorough reductions in cost and expense. The company expects to overcome the challenging environment and achieve the ninth consecutive year of sales and profit growth for 2008.

For the full year 2008, CAJ expects capital expenditure of ¥435 billion, depreciation of ¥370 billion, free cash flow of ¥255 billion and operating cash flow of ¥745 billion. Canon expects cash and cash equivalents to be ¥960 billion with a dividend of ¥110 per share by the 2008-end.

Canon is currently trading at 13.2x estimated 2008 EPADR, a premium to the industry mean and median. Although we believe that some premium is warranted given its strong position in the digital camera business, we don't see room for meaningful appreciation from current levels.