Monday, January 27, 2014

Sony Loses $2.2 Billion in Market Value After Forecast Cut- Discussion Topic 11/5/2013


  1. Highlights:

    1. 4 consecutive losses, net loss 19.3 billion yen for the fiscal year 2013, missed 15 billion yen profit consensus.
    2. TV sector: TV industry is saturated, and it is very hard to differentiate TVs due to intense competition. Sony also lost market shares to other companies: Panasonic, Samsung, LG
    Smartphone: The industry is booming, but Apple and Samsung's are the market leaders, and Sony has less 3 % market share in the US, global sales can be majorly attributed to the Japan and EU markets.
    Game consoles: PS3 and PS4 are all priced to cover variable cost, depend on the software to gain profits, but other smartphone segment seem to compete with console gaming platforms. Furthermore, Wii and Xbox are fomidable competitors.
    Movies:disastrous movie box offices, poor movie selections- "After earth"- Will Smith
    Credit ratings: downgraded by major credit rating agencies, only 1 grade away from junk ratings. It may make Sony harder to obtain favorable financing.

    Strongly recommend to sell or short
    In short, Sony has lost market leader positions in TV, Gaming sectors, Movies segment performs poor, Smartphone sales are declining with no growth in the US and China- those two largest smartphone markets.
    Fundamentals miss expectations with no sign to recover, and poor credit rating will increase the financing costs and may drive away institutional investors.

  2. Business Segments:

    Most profitable: Mobile products & Communications (MP&C) 300.4 billion yen → 418.6 billion yen, a 39.3% increase
    Second most profitable: Music; 99.2 → 115; 15.9% increase

    Worst: Devices; 249.9 → 208.1; 16.7% decrease in sales

    Challenges for the company:
    - Appreciation of Yen: adversely affected the purchasing power of Sony products by non-Japanese consumers, and thus reduced the overall demand for Sony
    - Financial crisis of 2008; the great east Japan Earthquake
    - Management are too conservative to make a change
    - Little to none of the merger and acquisition is conducted. The process of restructuring the company is disappointed.
    - Sony’s technological innovation is losing their edge to Samsung and Apple Inc.

    Market Cap 17.03B 32.02B 24.11B
    Revenue 90.74B 31.88B 93.67B
    Op Margin 0.00 0.09 0.03
    EPS 0.80 0.85 0.55
    P/E 21.19 41.31 18.93

    Short-term: Hold; Long-term: Buy

  3. Although Sony has faced four straight annual losses and net loss totaled 19.3 billion yen in the three months ended Sept. 30
    I would suggest to buy Sony stock.


    They have planning problems in TVs, Cyber-shot cameras and Hollywood movies.
    In the TV segment, Sony stuck with TVs said Yuuki Sakurai, Chief Executive Officer of Fukoko Capital Management Inc, “Panasonic had its back to the wall”
    In the Film Studio Segment, Sony has big-budget tentpoles “After Earth,” with Will Smith, and “White House Down,” with Channing Tatum and Jamie Foxx, failed to connect with audiences.

    Reasons to buy:

    1. Sony is big and their board is trying to correct their direction.
    2. Sony cut their costs and undertake “more aggressive reform” of its product portfolio and entertainment business.
    In the movie site, Captain Phillips and Cloudy with a chance of Meatballs 2 have been well received by audience.
    In the Digital segment, Sony plans to introduce the PS4 in the U.S on Nov 15th a week before Micsoft Corp releases its Xbox one. They expect to reach 5 million units by March 31.
    In the smart phone, Compared to Samsung Galaxy Note 3, Xperia Z1 has received excellent market response and reviews from the time they were released Sony Xperia Z1 wants to propel it to third place in the global smartphone market.

    Conclusion: Sony will get better.

  4. Investment Thesis: underweight for short term and long term

    • Lost 2.2 billion in market value after cutting earning forecast.
    • Moody plans to cut Sony’s credit to the lowest investment grading rating.
    • Sony met planning problem. Larger TV volume downswing trend than estimation.
    • Sony Film studio got a loss this summer.

    • Xperia Z1 is regard as a profit generator and Sony maintains its smartphone sales forecast.
    • PS4 will be released this month.

    • As Sony’s main competitor, Panasonic got loss last year of 7.68 billion dollar but it estimates net profit can be 1.02 billion dollar this year. Panasonic made such a huge change by reorganization. I don’t think Panasonic strategy is reasonable for Sony.
    • Sony has great capability in both software and hardware, especially hardware. Sony now concentrates on the smartphone, film and games industry. Sony is capable to build an eco system with its hardware and software. However, it’ll take a long time to complete. Sony is testing the patience of its investors.
    • Although TV industry has been saturated and highly competitive, I don’t think Sony should quit. TV is still a necessity for most of families. Sony has core TV techniques and great reputation among consumers. Sony needs to cut cost and lower TV prices to make it more competitive.
    • PS3 was released in 2006, 7 years ago. PS4 will surly stimulate the investors’ confidence and the stock price will recover from pessimistic for a while. But I don't think it can eliminate the passive effect of huge loss estimation.

  5. Investment Thesis- Negative

    • The three major targeting business zones: digital imaging, games and mobile devices are experiencing either uncertainty or fierce competitiveness

    • Negative appearance by looking at the composition of Sony’s revenue (Q1 FY13)
    - Imaging Products & Solutions (IP&S) 6.53%
    - Games 6.5%
    - Mobile Products & Communications (MP&C) 15.81%
    - Home Entertainment & Sound (HE&S) 13.94%
    - Devices 10.86%
    - Pictures 8.8%
    - Music 6.2%
    - Financial Service 10.77%

    • Sony’s making profit in first quarter mainly due to:
    - Cutting jobs
    - Favorable foreign exchange rate: In Q1 alone there was a 190 Billion yen ($1.93B) revenue gain from FX

    • Software investment in smartphone market
    • A broad set of business to focus; Distract the resources for each business in Sony.

  6. Before this quarter, the free cash flow had been decreasing after 2009. The only exception before this quarter is the fourth quarter of 2013 fiscal year, when the company sold its U.S. headquarters that it had occupied for 20 years to raise $685 million in cash.
    Moody’s downgrading will negatively impact Sony’s ability to raise capital through corporate bonds, which adds up to Sony’s difficulty with its cash flow.
    Since CEO Mr. Hirai took the job in April, 2012, the company’s strategy has been to focus on hardware business, which is first of all, decreasing in size, secondly, increasingly move to newly industrialized countries such as South Korea, Taiwan, and Chinese Mainland. I think it is just difficult to base the manufacturing operations of a hardware business in a developed country where labor and land are expensive. Plus, as Bill has mentioned, we also need to take into consideration of current rate of Japanese yen.
    Looking at some market data, despite the fact that Sony has a strong product portfolio in smart phone, such as Xperia Z1, the company is lagging behind in market share. The company is still behind Samsung, Apple, LG, Lenovo, and ZTE in worldwide sales, according to latest statistics from IDC.
    With that being said, the shopping season is just around the corner, and for Sony, there are quite a few products in the pipeline, such as PS4, and ultra-high-definition Bravia TV sets. It’s yet to see whether Sonly can improve its revenue and cash flow by increasing its sales, while at the same, control its operation costs under a certain level.

  7. Investment Thesis: Short-term underweighted and long-term hold
    Reason to underweighted in short-term
    1. Short-term profit loss: Sony experienced profit decrease in second quarter and significant profit loss in total of 19.2 billion yen in three quarter, which is much lower than estimated profit.
    2. Credit downgrade: Moody’s placed Sony’s Baa3 long-term senior unsecured bond. The rating actions also reflect the slow progress being made in improving overall profitability.
    For its current fiscal year, Sony expected to have consolidated sales of 7.7 trillion yen due to a downward revision in the annual unit sales forecasts for certain electronics products. This forecast is 60 billion below Sony's August forecast.

    Reason to hold in long-term
    1. Sales are expected to grow: Sales rose 11%, driven by weakness in the yen and strength in smartphones. However, expense deleverage drove the earnings shortfall. We remain cautious regarding the global macro environment, although we expect sales to accelerate in the last quarter, boosted by the PS4 and Sony Smart phone.
    2. Positive expectation on Sony Xperia Z: Sony Xperia Z plan to use Qualcomm chipsets. Qualcomm's Snapdragon 800 quad core processors will gain traction with increased deployment of 4GLTE technology across emerging nations like India and China.

  8. Investment thesis: Sell

    - Sony Faced a 2.2 billion lost in market value after Hirai slashed his full-year net income projection by 40 percent;
    - Sony’s net loss totaled 19.3 billion yen in the three months ended Sept. 30, much lower than estimated profit.
    - The losses mostly came from its TV market and film studio.
    - Sony started cutting costs by jobs cutting and assets selling
    - Shifted its sales expectation from film units to digital imaging, games and mobile devices
    - Moody’s downgraded Sony’s credit rating

    Products outlook:
    - PS4: Release Date Nov 15. One week before Xbox One with lower price.
    - Xperia Z1 handset, introduced in September. Released almost the same time as Apple iphone 5s & 5c and LG Vu3 with similar or even higher price.
    - TV: Promoting ultra-high-definition Bravia sets. Expect annual sales to be 1 million lower than earlier prediction. Losing market share.

    - Sony faces fierce competition in smartphone market. Leading companies, such as Samsung and apple take most of the market share and put Sony into a very tight spot.
    - The TV market is mostly saturated, leading to a risk for TV volume declining and revenue decreasing in TV sales
    - PS4 is expected to bring profits to Sony after its release in Nov, but may not be large enough to cover its losses in other sectors.
    - Larger financing costs because of credit downgrading