An Original Copier
Barron's Online

Monday, January 6, 2003

Ricoh leads the industry with advanced digital office machines


FEW BUSINESSES are as fiercely competitive as that of copiers and printers.
Price-cutting is endemic, profit margins are mostly razor thin and global
demand in recent years has been flat. Thus it comes as a bit of a surprise
to hear that some companies are making money in the business. We're not
talking about Xerox, whose name was once synonymous with the word "copy,"
but has fallen on hard times. Nor do we include companies selling only
conventional, stand-alone black-and-white copiers.

Ricoh Corp., Japan's top copier manufacturer, by contrast, is headed toward
its 11th consecutive year of record earnings. It's achieved that by
embracing the transformation of copiers into complex, digitalized machines,
linked to computer networks and capable of printing and scanning documents
in seconds and reproducing them in color or black-and-white. For Ricoh,
that's meant higher profit margins than for the old-fashioned copiers
office workers have come to know and loathe.

Unlike Xerox, or its chief competitor Canon, Ricoh isn't exactly a
household name. But it's still one of the world's largest makers of
office-automation equipment, including printers, fax machines and scanners
as well as copiers. The company also is a major supplier of semiconductors,
compact-disc drives and digital cameras. Copiers and supplies account for
about 55% of Ricoh's annual sales of $14.5 billion.

In the fiscal year that ended last March, Ricoh increased its earnings for
the tenth year in a row, by 15.8% to $514 million, or $3.50 per American
Depositary Receipt. (One ADR equals five shares of the Tokyo-traded common
stock.) The results were aided by a weak yen that makes products cheaper in
dollar and euro terms, new automated "system solutions" for corporate and
government customers at home and abroad, plus an aggressive cost-cutting

Ricoh officials say they don't expect to match last year's robust growth
this fiscal year, due in part to losses incurred by a Mexican subsidiary
and costs associated with Ricoh's 2001 acquisition of Lanier Worldwide, a
major international distributor of office equipment. But digital copiers
and color printers continue to sell well in Europe, they say, and the
company finally is making some significant inroads into the higher-margin,
large-company copier-printer markets in the U.S. -- a business once
dominated by Xerox.

"We are managing to move forward in a very difficult environment," says
Tatsuo Hirakawa, Ricoh's deputy president. "Despite the generally gloomy
global economic outlook, especially in the U.S., we still believe we can
achieve record sales and earnings this year," he says, while declining to
make a specific prediction.

Consensus estimates call for the company to earn $3.83 per share for the 12
months ending next March, an increase of 9%, and $4.04 per share the
following year.

"Ricoh remains a very well-managed company with a medium-term strategy that
is still intact," says Noriko Oki, who follows the company for Morgan
Stanley in Tokyo. She expects Ricoh's earnings, which have increased nearly
100% during the past three years, to grow at an average annual pace of 10%
over the next five years. (The company projects operating earnings of $1.5
billion by March 2005, compared with last year's $1 billion.)

At 21 times forward earnings, Ricoh's stock is trading at the bottom end of
its range for the past five years, Oki says. The ADRs recently traded at
81.50, near the low end of their 52-week range of 80 to 95.75. If the
company's earnings grow as expected, Oki thinks they could reach 122 over
the next 12 to 18 months.

"Ricoh is shifting from stand-alone copiers to higher value-added products
such as high-speed network digital printers, multifunction printers and
color printers which are steadily improving margins," she says. "It is
business strategy that will greatly benefit the company in the future."

Of course, not everyone is as bullish as Oki.

"During the past few years, Ricoh has enjoyed a significant advantage over
its competitors, both in copiers and printers, by being able to deliver
early and in quantity," according to Alan Bell, a London-based analyst with
Credit Suisse First Boston, who maintains a Neutral rating on the stock.
But Ricoh's competitors, he writes in a recent report, "seem set to close
the product gap during the second half of this year."

Perhaps, but Standard & Poor's recently affirmed its long-term and A-1
short-term credit ratings on Ricoh, saying the action was based on "the
company's strong position in the Japanese office copier market, its
improving position overseas and its strong cash flow and capital

That is due in part to Ricoh's growing presence in overseas markets, mainly
the U.S. and Europe, which account for less than 39% of total sales and a
slightly greater portion of total consolidated earnings.

During the past three years, Ricoh has steadily increased its position in
the $14 billion copier market in the U.S., the world's largest, mostly at
Xerox's expense. In 2001, Ricoh captured 17.7% of the U.S. copier market,
topping Xerox's 16.6% share and trailing only its Japanese rival Canon,
which maintained the top spot with a 33% share. Company officials estimate
Ricoh's U.S. market share has risen to 18%, an improvement from the less
than 15% share held three years ago. (Xerox's share during the same period
has nearly been halved from 28%.)

The surge in U.S. market share was aided by the acquisition of Lanier
Worldwide, which helped the company expand its traditional customer base
with small and medium-sized companies and also allowed it to move into
higher-end, higher-margin large-company markets with multiproduct system

"We are finally able to install business machines in major U.S. companies,"
says deputy president Hirakawa, referring to customers such as General
Electric and Hertz.

In Europe, Ricoh has been something of a Johnny- come-lately compared to
Canon and most of its competitors. But it jumped into the market in a big
way in 1995 with its acquisition of Savin, a small copier distributor, and
Gestetner Holdings (now NRG Group), the world's biggest distributor of
office equipment.

"As a result of the acquisitions, Ricoh has enjoyed tremendous growth in
Europe in the latter half of the 1990s," Morgan Stanley's Oki says. "With
its new marketing channels, the company has been able to introduce new
products and gain market share faster. This has added new revenue streams
for the company, which is something quite different from its competitors."

Five years ago, Ricoh's share of the European copier market was less than
20%. Currently it is 30% and rising, placing it second to Canon, which
enjoys a 36% share.

"Our goal is to become No. 1 in the markets for plain-paper copiers and
multifunction printers," says Masami Takeiri, managing director of Ricoh's
international marketing group. "And in color printers we believe we can
achieve the second spot."

Analysts and fund managers squarely place credit for Ricoh's recent
expansion and earnings continuity squarely on the broad shoulders of
60-year-old president Masamitsu Sakurai. The first Ricoh president with a
technology background, Sakurai joined Ricoh in 1966 and was picked over a
number of more senior candidates to become chief executive in 1996.

An outspoken, aggressive man, he has a penchant for judo and
skeet-shooting, the latter a skill he developed during his eight years as a
Ricoh manager in Britain and Europe. Sakurai stunned the Japanese media in
1999 when, in the midst of the country's worst recession in 50 years, he
boldly promised that he would double Ricoh's pretax earnings to
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