When assessing anystock , you need to weigh the risk
against reward. Yet for
shareholders, it's a challenging task. To be sure, it's really hard
to see how much risk there is when Apple's netcash balance stands
at $137 billion -- and is on its way to $200 billion in a few
years. Management has started dropping hints that
shareholder-friendly moves are coming, which usually means stock
buybacks or bigdividend boosts.
Still, even as Apple carries relatively minor risk, it's not
clear what kind ofupside investors should expect either. As I
noted a couple days ago
, competition is gaining on Apple, which could lead tomarket
share erosion and falling margins as price cuts ensue.
Yet there is another major consumer electronics company that
also carries a fairly low level of risk, but also offers the
potential of significant upside. It's a company that was the
"Apple" of the industry before Apple took off like a rocket during
the past decade. And it's a company that has been paying attention
to Apple's success, and intends to replicate the same path.
I'm talking about
, the Japanese electronics giant that had a huge run of success
with products such as the Walkman, Trinitron TVs and Playstations.
Yet Sony's best days are long gone. From fiscal (March) 2004 to
fiscal 2012, Sony's base of sales actually shrank by more than $10
billion (to a recent $69.5 billion). And investors have fled the
Seeds of renewal
Much of Sony's demise can be tied to the resurgent Japanese yen,
which rallied sharply against the U.S. dollar and the euro during
the past five years. That made Sony's cost structure, much of which
is still tied to Japan, far higher than rivals that had already
embraced lower-cost manufacturing sites in China, South Korea and
A pullback in the yen in recent months helps explain whyshares
have begun to rebound in recent months. The yen has been especially
weak when compared to the South Korean won, which may alter the
competitive balance between companies like Sony and So. Korea's
, as this
New York Times articlenotes
Citigroup's Kota Ezawa says the weaker yen "allows Sony to be
lessrisk averse in consumer electronics, where the strong yen had
forced it to abandon ordownsize operations." In fact, Sony's TV and
notebook PC divisions had been marginally unprofitable, but the
yen's slide now makes those divisions slightly profitable,
according toanalysts . Ezawa adds that asprofit margins tick up a
bit on the weaker yen, the companywill be able to generate a "wider
product lineup, increased R&Dinvestment , and the potential to
Indeed, a recently articulated management strategy sounds like a
blueprint for renewed relevance. Here are the key
Sony hasn't been much of a player in the smartphone segment, but
aims to build a more meaningful presence with its Xperia line of
phones, which were launched in January. Apple and Samsung dominate
the smartphone segment right now, with firms like
, Asus and others trying to solidify their role as a viable player
in those ranks. "Of the second-tier players, Sony could steal the
prize, thanks to its global reach, the depth and prospects of its
hardware features and functions, and its lineup of
smartphone-related products," suggests Citigroup's Ezawa.
Investors are also keeping an a close eye on the Feb. 20 launch
of the Sony PlayStation 4 to gauge the relative pricing and
performance of the new gaming console. In the past years, the
release of a new console has generally provided a boost to shares
of the console makers, and if Sony can capture positive initial
buzz with the new PlayStation, then analysts will start to focus on
sales andprofit upside for the division during the next two-three
Though the TV business has been a clear sorespot for Sony, the
pullback in the yen should eliminate the divisional bleeding as
gross profit margins moveback up to levels seen by Samsung and
others. In the next 18-months, Sony will either bring renewed
energy to this division in terms of new products and marketing
efforts, or shrink it further to divert resources elsewhere.
Investors would applaud either move.
Sony's film studio, Sony Pictures, is one of the few current
sources of strength for the company. Fiscal third-quarter
(December) sales rose 30% to $2.2 billion and generated roughly 10%
operating margins. This division would likely fetch $6 to $7
billion if Sony sought to sell it, according to analysts. This
would free up alot of cash to more aggressively invest in the
various consumer electronics divisions.
Meanwhile, by a pair of metrics, Sony's stock remains quite
inexpensive. First, shares trade at just 0.6 timesbook value ,
all trade above book value. And on an enterprise-value salesbasis ,
shares are given little credence, at least when compared to
Simply looking at past performance, Apple deserves a richer
valuation. But should Apple be worth nearly 30 times more than
Sony, on an enterprise value-to-sales basis? Said another way, if
Apple's franchise is worth roughly $300 billion, then should Sony's
franchise be worth just $12 billion?
As the recent fall in Apple's stock appears to anticipate,
Apple'sbusiness model is "reverting to themean ," which is to say
that forward growth rates and profit margins will likely start to
drift down toward the industry average. Sony, meanwhile, is armed
with considerable resources, and stands a decent chance of
generating accelerating sales growth.
Risks to Consider:
Sony's rebounding fortunes are tied to the yen, and if the yen
rallies back to recent heights, then investors would again sour on
Sony and other Japanese multinationals.
Action to Take -->
None of this is to suggest that Sony and Apple are comparable
companies. It's to say, however, that Sony's shares are notably
less expensive, even as the company aims to rebuild its broken
reputation. Though both of thesestocks have fairly limited
downside, a reinvigorated Sony appears tooffer greater long-term
-- David Sterman
P.S. -- If you like Samsung or Apple, then you might be
interested in following Amy Calistri, editor of our Stock of the
Month newsletter. Amy's compiled an astounding 87% winning record
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find our more about her incredible performance, go here.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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