Recovery stories often don’t look like them. Just take Sony Corp (ADR) (NYSE:SNE). For years, SNE stock was relegated to “also ran” status in the markets until it turned things around in 2016. Now, the question is whether it can maintain its momentum.
It’s a fair question. After skyrocketing to 60% returns in 2017, this year’s sentiment is much more muted. On year-to-date basis prior to its fiscal fourth-quarter 2017 earnings report, Sony stock was up a respectable 10%. However, shares hadn’t really moved much since late February.
I understand the hesitation. Starting from Q4 2016, Sony earnings delivered exceptional results (Editor’s Note: CNBC lists the referenced results as Q4 2017), generating an 85% average earnings surprise. The worst of this four consecutive beats came on Q1 2018 (listed as Q1 2017), when the consumer electronics firm “only” exceeded earnings per share expectations by 17%.
It is worth noting, however, that only one analyst currently covers SNE stock. Therefore, Sony is not beating an average estimate, just one estimate.
Either way, the common wisdom is that this kind of performance can’t keep going on forever. For now, the critics have it right. However, I wouldn’t get too comfortable ignoring SNE stock.
Tough Sony Earnings Result which Requires Context
For fiscal Q4, SNE stock registered an EPS loss of 13.3 yen, which translates to approximately a 12 cent loss. On paper, it’s a disappointing performance as Wall Street expected a two cent loss (listed as Q4 2018) heading into the Sony earnings report.
Moreover, in the year-ago quarter, the company delivered a 19 cent EPS profit, which obliterated the 7 cent forecast. Thus, the consecutive string of outsized positive earnings surprises came to a shuttering halt this morning.
That said, for the fiscal year, Sony registered a $4.43 billion profit, translating to $3.42 a share. For the fiscal year that runs through March 2019, guidance remained flat at $4.4 billion.
Unfortunately for long-term shareholders, Wall Street did not like what they saw. Pre-market trading started off ugly when the Sony earnings results were released, and got uglier heading into the opening bell.
Although I don’t agree with it, the bearish reaction was predictable based on previous quarterly results. However, the pessimists overlook critical context.
For starters, Sony brought in $17.9 billion in revenue, which is below the expected $19.6 billion. More importantly, this is approximately a 2.5% increase from the year-ago quarter’s $17.45 billion haul.
Second, the losses are largely attributed to known factors, namely, the mobile business. Naturally, Sony’s “Imaging Products & Solutions” division also took a hit, as the company’s smartphone camera sensors business slowed down.
But to counter these negatives, Sony intends to shift focus from smartphone sensors to surveillance products and automotive solutions. Also, its new semiconductor division — which is pivotal to Sony’s turnaround — demonstrated substantial momentum.
All in all, these are great positives for SNE stock that the bears are presently ignoring.
SNE Setup for Long-term Success
Irrespective of the Sony earnings results, I’m most impressed with how the company has positioned itself for long-term success. Don’t get me wrong: these quarterly reports are an important barometer for determining where the company is on its recovery plan.
However, I don’t want to miss the forest for the trees. A lot has changed since I last worked for the company. In all honesty, the organization that I personally remember is a completely different animal from what I’m seeing today. Management is supremely focused, and I’m not just saying that because I own Sony stock.
The evidence is plainly evident for anyone who cares to look.
One of the biggest complaints that I had — which I kept to myself while working there — was that SNE refused to acknowledge defeat in lagging business segments until it was too late.
That mentality has obviously changed. For instance, Sony’s essentially going on autopilot for its mobile communications business, which is fine. Last year, mobile generated nearly $6.6 billion, which is 37% off from average segment revenue since 2012 (Editor’s Note: This graph does not reflect Sony’s reported numbers for 2017).
That doesn’t worry me because Apple Inc. (NASDAQ:AAPL) and Samsung dominate this oversaturated market. As a result, Sony can’t get traction in the markets. What used to worry me was management’s decision to bankroll losing businesses. But operating margins are up significantly over the past few years, so execs have finally got a clue. That’s a big plus for SNE stock.
The other component I really love is video games. I don’t need to remind anyone that this sector is massive, and is only getting bigger. In 2017, Sony Interactive Entertainment registered $17.82 billion in sales. It’s also the one segment that has consistently overdelivered.
Don’t Overlook Other Positives for Sony Stock!
During the time Sony stock languished in the doldrums, you could barely find any positive coverage. If you didn’t know any better, you’d think that every Sony division was underwater.
Such thinking undercuts where the company has performed beyond anyone’s expectations. For instance, Sony’s music division is a relatively large revenue maker in a really terrible era for music. Last year, this business rang up nearly $7.3 billion in sales. Since 2012, the average revenue haul is $4.92 billion.
Also consider Sony Pictures. As with the music industry, the box office has declined under the new media paradigm. However, relative to average revenues of $7.62 billion since six years ago, last year’s haul impressed at over $9.2 billion.
Therefore, I’m inclined to believe Sony stock is similar to Microsoft Corporation (NASDAQ:MSFT). Just like Microsoft, SNE has always had the talent and resources; they just needed a good kick in the rear. They received exactly that, and more importantly, they’re applying the lessons in earnest.
As of this writing, Josh Enomoto is long SNE.
Editor’s Note: Sony Corp reported that it just ended Fiscal 2017. Many sites, however, are reporting that Sony just ended Fiscal 2018. In this article, we used Sony’s own dates and have noted any discrepancies.