TheStreet.com Ratings: Digital Imaging Looks Sharp

The company also implied that this order lag may be an additional drag on seasonably weaker second-quarter results. Lost in all this excitement about new products is that net cash from operations is running at an annualized rate of almost $1 billion per year.

This, along with $2.3 billion in cash and short-term investments on the balance sheet and no major long term debt, indicates that the company has more than ample resources for future acquisitions or even more aggressive share repurchases.

With digital imaging going mainstream, we are looking forward to hearing in the coming weeks how management intends to put its capital to work to take advantage of this boom.

Rising Tide

The Interactive Advertising Bureau and PricewaterhouseCoopers estimated that Internet advertising revenue for 2006 was a record $16.8 billion, a 34% increase over the previous year.

As the leading vendor of imaging tools for professional developers, Adobe stands to be a major beneficiary of this growing use of digital images on the Web.

Below are some facts from the market research firm Parks & Associates that point to a robust future for digital imaging companies:

• 84% of Americans have digital photos but no cameras (get them emailed).
• The average U.S. consumer has 1,200 digital photos.
• Consumers collect content, but only one-third share it.
• The U.S. is falling behind other countries in offering TV via the computers.
• More TV tuner products will be launched.
• Fewer TV programs will be watched exclusively via a TV set.
• Microsoft's new Windows Vista Media Center allows for TV viewing but does not supply a TV tuner.
• 25% of the U.S. now has HDTV.

Canon Fodder

The clearest beneficiary of digital imaging trends, however, is Canon (CAJ Quote). The company has a very large portfolio of global products, including the Canon high-definition video camcorders (HV10 and HV20) that offer stunning image quality at reasonable prices. There is also a professional series at much higher price points.

In addition to the consumer aspects of digital, Canon also serves the business market. It manufactures copy machines and computer peripherals, mainly laser and bubble-jet printers, business systems (such as faxes, computers, micrographics and calculators), single-lens reflex cameras, compact cameras, digital cameras and video camcorders.

Fundamentally, our stock ratings model gives Canon high marks across the board. The following chart shows that the market seems to agree.

Waning Enthusiasm for Avid

But not all stocks are as well positioned for the digital revolution as Adobe and Canon.

For example, Avid (AVID Quote), a $1.3 billion market-cap company that creates digital media production, management and distribution software, is on the more speculative potential takeover side.