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Waiting On Sony (SNE)

 June 05, 2012 10:07 AM

(By Kevin Donovan) We were nostalgic the other day – an increasingly worrisome sign we are slipping into our dotage – when our wandering reverie turned to our shoeboxes full of cassettes, our old Walkman and the fortunes of its creator, mighty Sony Corp (SNE).

The instigator of this walk down memory lane?  News that shares of the Japanese electronics giant had dipped below 1,000 yen on the Tokyo Stock Exchange for the first time since August 1980. According to news accounts, this was one year after the Walkman was introduced.  The stock peaked at 16,950 yen in March 2000.

The American depositary shares traded on the New York Stock Exchange now stand at $12.79, just pennies above the 52-week low. The ADS are down 51% in the past year and 29% year to date.

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The reason for this poor performance is straightforward: Sony hasn't made any money in four years. Last month Sony reported a record annual loss of 457 billion yen ($5.7 billion) for the year through March 2012, the end of its fiscal year.

But what about going forward?  Analysts expect Sony to turn profitable in fiscal year 2013. But the market values those forward estimates at just 7.61 times, indicating a relative lack of confidence in those estimates and their sustainability.  

Can Sony turn around?  Investors will be looking for signs the new management team, headed by new CEO Kazuo Hirai.  The company has guided to a return to profit for the fiscal year through March 2013 at 30 billion yen ($375 million).

[Related -Sony Corporation (ADR) (SNE): PS4 Google Trending In The Right Direction]

That means a comeback in the ailing electronics business.  In corporate boilerplate fashion, Sony says it will strengthen core businesses (Digital Imaging, Game, Mobile), turn around the television business (which has lost money for the last eight years), expand in emerging markets, and, of course, the catch-all realign the business portfolio.  Sony says it is targeting sales of 6 trillion yen and operating income margin of 5% in electronics, and sales of 8.5 trillion yen, operating income margin of more than 5% and return on equity of 10% for the company overall.  Also in the mix is cost savings, in part by laying off 6% of the workforce.

All well and good.  After all, there are cases of one-time giants losing their way and managing to reclaim the glory years.  Look at IBM.

But Sony faces a fiercely competitive smart phone and tablet world, as well as the possibility of an Apple TV, long-rumored though still unseen.

Investors will be watching for signs that CEO Hirai's plans bear fruit.  We think they could as the company cycles the disruption wrought by last year's earthquake and tsunami.  One big risk is that global recession cuts into consumer discretionary purchases.  The Eurozone crisis, the slowdown in Chinese growth and lackluster U.S. jobs growth notwithstanding, world economic growth is still positive, though.

We are holding on to our cassettes and Walkman for sentimental reasons and would hold Sony shares at these levels.  New positions in the stock, however, are bets the market is wrong to be skeptical of a return to profitability.



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