Click to EnlargeSony (NYSE:SNE) named a new CEO on Wednesday, but based on the company’s latest earnings report, it looks like it might take more than a new face at the top to turn the business around.
On Thursday, Sony reported a loss of $2 billion — its fourth earnings miss in a row — and cut its forecast for the full year, driving its shares down over 6% on the day. Sony lost $2.03 per share, versus expectations of a 30-cent loss, and said revenues fell an astounding 17.4% from year-ago levels. The weakness was widespread, as the company reported softer revenues in televisions, mobile phones, games and entertainment.
On Nov. 10, with Sony shares at $17.20, my article Is Sony a Bargain in the Rough? presented a negative outlook on the stock and concluded that there was no reason to buy even with the shares off over 50% from their levels of early 2011. Sony closed at $17.09 on Thursday, and three months later there still is no compelling reason to try bottom-fishing in shares of the once-proud electronics giant just yet.
In short, too much has to happen for Sony to return to profitability in the immediate future. Incoming CEO Kazuo Hirai, known for his success in the PlayStation division, summed up the job ahead with the statement, “The path we must take is clear: to drive the growth of our core electronics businesses — primarily digital imaging, smart mobile and game; to turn around the television business; and to accelerate the innovation that enables us to create new business domains.” Hirai also faces the twin tasks of reorganizing Sony’s internal structure and rationalizing the company’s sprawling, diverse business lines.
If he can accomplish this broad mission, Sony has the potential to become a compelling turnaround story — at some point. Still, bringing Sony into the 21st century is an enormous undertaking that likely will take several years to play out.
Does this mean Sony is a short? At this point, probably not. Even as Sony staggers to the end of its fourth consecutive year of losing money, there are three factors that could prevent the stock from moving to fresh lows.
It’s hard to get a fix on Sony’s P/E ratio since there is only a forward (2013) P/E to analyze, and even that is dependent on rapidly shifting earnings estimates (61 cents now versus $1.09 90 days ago). But price-to-book and price-to-sales both indicate room for upside if Hirai can in fact execute a turnaround:
Greater Potential for Positive News Flow
While Harai doesn’t take over until April, it’s likely that the new CEO — with a mandate to turn the business around quickly — will make a splash before the year is out. In the news conference that followed the announcement of Harai’s ascension to CEO, he tellingly stated, “I hold a very severe sense of crisis … Without a faster sense of speed, Sony cannot win.” This signals a greater likelihood that Sony will soon be cutting costs, selling off underperforming business lines, or otherwise taking steps that will recapture investors’ attention and cause the stock to experience pops from time to time.
A Decline in the Yen
The strong yen, which has made Sony’s products more expensive for overseas buyers, has been a tremendous headwind for the company in recent years. While there is no sign of an imminent reversal in the yen, anyone considering an investment in Sony — short or long — needs to be aware that any turnaround in the yen’s upward trajectory would likely fuel a short-term recovery in the stock.
The yen: a challenge for the past five years
From a longer-term standpoint, however, a story that relies on valuation, cost cutting and restructuring can only go so far. The primary challenge for Sony is developing a stable of compelling, cutting-edge products that will get consumers excited and help the company regain its deteriorating brand cachet — which is preventing its products from commanding the premium prices it once did. Whether Sony can make this shift very much remains to be seen.
The bottom line: Sony is probably closer to a bottom today than it was three months ago, but for now it remains a show-me stock. Until the company can demonstrate that it is on a clear path toward returning to profitability, the stock is unlikely to provide investors with any meaningful upside.
Addendum: Although the news about Sony’s new CEO was already out during market hours on Thursday, it took the stock a day to react: on Friday, it was up 12% as of midday. Clearly, investors are taking the news as a sign that the worst is now behind Sony. The high 5.5% short interest (as of 1/13/12) is undoubtedly adding fuel to the fire. While this rally may continue for another day or two, the company’s fundamental problems — expensive products, a lack of focus, and no innovation — continue to represent daunting long-term challenges. While it usually pays to bet on a turnaround story before the actual turnaround begins, the risks remain high enough that there needs to be evidence — and not just hope — that Sony’s fortunes are improving before it becomes a long-term buy.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned stocks.