A headline story since 2013 began has been the policy of new Japanese Prime Minister Shinzo Abe to target an inflation rate of 2 percent and devalue the yen to make Japan more competitive. Japan has been in a deflationary cycle for two decades and its ratio of debt to gross domestic product had spiraled to 242 percent by year-end 2012.
The country desperately needs to find ways to kick-start growth and the current administration, in conjunction with the Bank of Japan (BOJ), believes this can be achieved by letting the national currency depreciate. The Japanese exporters are among the main beneficiaries of the new policy and car companies such as Toyota, Honda and Nissan saw strong rallies on the Tokyo stock exchange. Other beneficiaries should be technology companies such as Panasonic and Sony.
Sony (ticker: SNE) was trading at over $50 per American Depositary Receipt share only five years ago but in 2012 dropped below $10. Since the beginning of the year, the stock’s seen a large rebound to around $15 per share, but it’s still far off from its high. Sony shares trade in both Tokyo and New York.
Sony is one of the largest and oldest Japanese technology companies, with roots going back to 1946. Sony was the inventor of many technological breakthroughs in the 1970s and 1980s. One of its most iconic innovations was the Walkman.
Today the company has a diversified revenue mix that includes home entertainment/sound (19 percent), devices (15 percent), games (11 percent), pictures (9 percent), music (6 percent) and imaging products and services (11 percent).
Digital imaging is a large cash cow. The company has a 40 percent global market share in video cameras and 20 percent in digital cameras.
Sony’s gaming device PlayStation was long another stronghold, but it has come under severe competition from Nintendo’s Wii and Microsoft’s Xbox. The release of PlayStation 4 should help the company regain its lost ground.
Among other growth opportunities, China has hinted that it would allow gaming consoles for the first time in a decade, which might help Sony. Also, an improvement in the company’s smartphone segment with more attractive designs and features should help this unit regain lost profitability in the next few years.
Sony has a market capitalization of $14 billion. Its sales are expected to reach close to $80 billion by the end of 2013 (the company’s fiscal year ends in March).
Earnings are expected to recover strongly over the next two years after several years of heavy losses. Earnings per share are estimated to reach more than $0.37 in 2013 and more than $1 in 2014. The company should also pay a dividend of $0.30 per share in 2014.
Sony’s operating margins are predicted to become positive again and reach 5 percent in three years’ time. With this improvement, return on equity should also improve from a paltry 2 percent to 8 percent.
Sony is trading at 15 times 2014 earnings estimates, 0.7 times book value and 2.5 times EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization).
As with any investment there are risks to investing in Sony. Technology players around the world are under continuous margin pressure. Competition in technology is ferocious with large competitors such as Apple, Samsung and others all vying for the same customer. A stronger yen might also hurt the company’s export attractiveness.
Finally, Sony has lost money for four years, so it might be difficult to turn the company around.
Companies mentioned in this article are for educational purposes only; no investment recommendations are intended. Readers are urged to conduct their own studies of any stocks of interest.
