Despite Improved Sales, Sony Continues to Disappoint Investors
I will admit it: I am completely biased in my electronics company preference. My televisions, sounds systems, and gaming consoles are all made by Sony Corp. (NYSE:SNE) I have been loyal to the company’s products for the past two decades. But to be honest, the company is really struggling. I have long considered buying the stock ahead of major product releases, most recently being the release of the PlayStation 4. But time and again, the company has proven why my decisions not to by the stock have been correct, despite my affinity — or perhaps addiction — to its products.
Why do I say this? Well, Sony just recently released its quarterly earnings, in which the company reported a mind-boggling $1.3 billion quarterly loss for the fiscal year through March 2014, which it attributes to costs from selling its personal computer business as well as other input costs. To make matters worse, Sony is now forecasting further losses as it struggles to execute a long-promised turnaround — one that I have been waiting for. Mind you, this loss is over three times its loss of around $400 million the previous year.
The company is forecasting another dismal year for fiscal 2015, although not nearly as bad as fiscal 2014. It forecasts a $490 million loss for the year ending March 2015, as overall sales are expected to be flat. A big contributor is the loss of its Sony Vaio PC business. For those keeping score, by the way, PCs/tablets are the only major electronics I own that are not Sony-made.
The dismal earnings were not incredibly surprising. What was surprising was the sheer total of the losses. I expected losses when, earlier this month, Sony said it would report a bigger annual loss than forecast because of expenses that stemmed from selling Vaio, such as restructuring charges and dealing with excess inventory in components. But I did not see $1.3 billion in losses in the cards.
Those PC-related losses will haunt Sony for some time, as they are expected to continue this fiscal year, totaling $780 million on top of the $900 million for the fiscal year ending March 2014. For those paying close attention, the losses reported by Sony were 70 percent attributable to the Vaio losses. Another portion of losses were due to a drop in the value of its overseas disc manufacturing business and its battery business. Sony also lost money in its mobile, device, and video game businesses.
There are some positives, however. Sony saw a nice improvement in its sales, which rose 14 percent to $76 billion for the fiscal year. It is unfortunate to see the company struggling, given that most Japanese exporters, including Sony, are benefiting from a weak yen, which boosts the value of overseas earnings. Sony also trimmed losses at its TV operations, which have been struggling for nearly a decade.
This division has always been a thorn in the side for a company that is perhaps best known for its high-quality TVs. To help cope, Sony is splitting off its TV division to run it as a wholly owned subsidiary. Sony also booked a profit in its movie business, where TV productions benefited from licensing agreements for game shows. Sony also made money from its music unit.
In response to the dismal year, Chief Executive Kazuo Hirai and some 40 other senior executives are returning their entire bonuses and reducing their annual pay by 40-50 percent. Sony executives have taken some pay cuts in recent years to take responsibility for the company’s poor performance – this move is a drastic but responsible action on management’s part. I applaud them for this.
Going forward, Sony needs to leverage its gaming business and take advantage of the cloud. It is also facing stiff competition, even in its television lineup. In my opinion, research and development should focus here, as margins are strong from TV sales. The movie business is going strong, as well, although it is an unpredictable and unreliable source of consistent revenue. Now that the PS4 is out, Sony can focus on selling accessories and peripherals, which drive revenues. Finally, once the damage from the sale of the Vaio PC business is complete, the company may start to turn things around. It will be at this point that the stock may be a buy.
Disclosure: Christopher F. Davis owns numerous Sony devices, but holds no position in Sony stock and has no plans to initiate a position in the next 72 hours. He has a sell rating on the stock and a $14 price target.