It’s Still Tough to Make a Bull Case for Sony Corp (ADR) Stock

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Sony Corp (ADR) (NYSE:SNE) has had a truly impressive run for a company its size. Since late 2012, Sony stock has quintupled, with SNE stock touching a nine-year high earlier this year before a modest pullback.

That said, of late, Sony stock has slowed down, with only limited gains over the past four-plus months. And there’s two ways to look at that recent trading.

The first is that it presents another buying opportunity for SNE stock. Third-quarter earnings were impressive, with the company sharply raising full-year profit guidance. SNE looks cheap, at under 16 times forward earnings per share. And there are a number of attractive businesses under the Sony umbrella, ranging from the PlayStation to image sensors to a suddenly improving TV category.

The other way to look at Sony stock, however, is to believe that perhaps the easy money has been made. Sony has some attractive businesses, to be sure. But its wide reach also includes a few segments that are a drag on growth. And with the conglomerate model falling out of favor of late, SNE could be a stock that always looks cheap going forward.

The Bull Case for Sony Stock

The simplest bull case for Sony stock is that performance has improved markedly the last few years — and still is getting better. Back in February, Josh Enomoto detailed the company’s operational turnaround. And the news on a fundamental basis looks good ahead of the company’s fiscal year-end report, likely due next month.

Updated guidance following third quarter results projects a nearly 12% increase in revenue (in Japanese yen). Operating income is guided to increase by roughly two-thirds, excluding one-time factors in the prior year.

And the improvement year over year will be broad-based. Game & Network revenue is projected to rise 17%, and profits 33%, as the PlayStation continues to outperform the Microsoft Corporation (NASDAQ:MSFT) Xbox. The Music and Pictures division is growing nicely. Home Entertainment & Sound sales should rise ~15%, with profit up 37%. Both Imaging Products and Semiconductors are driving double-digit growth as well.

Even the Financial Services division (banking and insurance) is growing revenue, albeit with some margin compression. Across the board, save for the smartphone business, profit growth looks impressive. And yet Sony stock is trading at a relatively depressed multiple. A 15 forward P/E multiple sits not far above Walt Disney Co (NYSE:DIS) — which is posting much slower growth.

And Sony has a fair amount of exposure to growing categories. Half of segment-level profit comes from PlayStation, semiconductors and image sensors. All three categories look set up for growth going forward. And with SNE stock pricing in very little of that growth, that seems to set up a buying opportunity.

The Concerns Around SNE Stock

I do like the bull case for SNE. Forced to choose, I’d rather own SNE stock than short it. But at these levels, SNE still doesn’t look quite compelling enough for a number of reasons.

The first issue is that even the growing categories have some risks. Semiconductor stocks had been hot until recently, led by Nvidia Corporation (NASDAQ:NVDA) and Micron Technology, Inc. (NASDAQ:MU), among others. But that remains a cyclical business, as is the image sensor space. Gaming is hot, but the high-end of gaming is moving away from consoles, as witnessed by Nvidia’s own growth.

The second problem is that the rest of the business still looks relatively weak. The Financial Services business includes 63% ownership of Sony Financial Holdings Inc (OTCMKTS:SNYFY). That stock hasn’t gone anywhere for years now. Music and Pictures have shown choppy performance. Home Entertainment & Sound has rebounded this year — but long-term, hardware exposure still seems a negative, as I argued last year. On top of all of that is a heavy exposure to the yen, which hurt fiscal 2017 results, and has helped so far this year. But with the yen again strengthening, that tailwind may be moderating.

The biggest issue, though, is that it’s tough to invest in Sony stock, because much of the bull case for SNE is easier to play elsewhere. Hot on gaming? Buy NVDA, Electronic Arts Inc. (NASDAQ:EA) or Activision Blizzard, Inc. (NASDAQ:ATVI). There are myriad more direct plays on semiconductor growth. (I still like MU stock, particularly after a recent pullback.) A weaker yen would help Sony — but there, too, investors can make that bet in multiple ways.

None of this is to detract from the turnaround at SNE — or suggest that it’s radically overvalued. There is a case for more upside from Sony stock. But I’m not sure there’s that much upside left — and if there is, whatever drives those gains in SNE stock likely will have a more positive effect elsewhere.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/still-tough-make-bull-case-sony-stock/.

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