Game Over for Sony (SNE)

This week, shares of electronics giant Sony (SNE: Charts, News) plunged to fresh lows after it doubled its annual loss forecast to a record $6.4 billion. The Tokyo-based company, which has seen its shares plunge nearly 40% over the past twelve months, also announced that it would lay off 10,000 employees, or 6% of its global workforce, in an effort to contain costs.

New CEO Kazuo Hirai, who took over the position from Howard Stringer last month, faces several major challenges, as the former market leader finds itself besieged by Apple (AAPL: Charts, News) and South Korea's Samsung Electronics. As a dire sign of the times, Apple and Samsung's market caps are worth 30 times and 10 times, respectively, that of the beleaguered 65-year old company.

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Sony's television unit, which has been squeezed by paper-thin margins, a strong yen and waning demand, remains the company's Achilles' heel. Sony's industry peers, Sharp and Panasonic, have struggled with the same problems. The company announced that it would spend 75 billion yen ($926 million) on restructuring costs throughout fiscal 2012, with a target of reducing the fixed costs in its TV business by 60% by fiscal 2013. Sony is also aiming to reduce its total business operating costs by 30%. In addition, it is expanding its rapidly-growing medical business, targeting annual revenue of 50 billion yen ($617 million) in the segment by fiscal 2014. Sony also stated that it was "scouting for acquisitions" and other investments.

Japanese analysts were pessimistic regarding Sony's recovery prospects. "Japan's consumer electronics industry is facing defeat," stated Fujio Ando, a senior managing director at Chibagin Asset Management. Others believe that Sony is too diversified, with 14 business segments spanning music, medical equipment, video games, televisions, portable electronics, semiconductors and computers - which weaken the company, like an over-diversified mutual fund, rather than strengthen it. Yuuki Sakurai, CEO of Fukoko Capital Management, remained pessimistic regarding the company's valuation. "The market's expectation about Sony is for the company to again become a creator of the Walkman," Sakurai stated. "That's a tough goal as the times have changed."

Last month, Kazuo Hirai, who has been with Sony for 26 years, hired a new management team with a revamped business structure. Hirai put himself directly in charge of the company's home entertainment division in an effort to save its profit-draining TV business, which has reported losses for eight consecutive years. Apple's long rumored television set, the successor to its moderately successful Apple TV set-top box, could also become a market disrupting product if it arrives later this year. Hirai has stressed that the company would focus on three core competencies - games, mobile devices and digital imaging - its most profitable segments, rather than spreading its resources thin. Hirai also hinted at spinning off unprofitable segments to increase margins.

Prior to his appointment to the top post, Hirai turned around Sony's ailing Playstation segment, which had been drained from several consecutive quarters of negative video game sales. Hirai promised to take "painful steps" in order to return the company to profitability, and his reduction of 10,000 employees backs his promise. 5,000 employees would be laid off, while another 5,000 would come off the company's payroll with the sale of its chemicals business and a small LCD fabricator. "We have heard a multitude of investor voices calling for change," Hirai appealed to journalists. "Sony will change."

Even at its depressed price, Sony's stock still trades at a premium to the market, at 20 times forward earnings, hinting at lower prices ahead if Hirai is unable to stop the company's bleeding within the next year.

Other News About SNE
Sony Tunes Out TVs as Hirai Sees Future in Imaging, Portables
Sony shifts its focus to three core competencies.
Sony firing 10,000 workers in major restructuring effort
Sony slims down in an effort to stay afloat. Other Stocks in the News
U.S. sues Apple, publishers over e-book prices
Apple gets hit by antitrust charges.
Yum CEO David Novak on rubber chickens, China and Taco Bell
Yum's CEO drafts out his plan for global growth with his flagship brands.

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Published on Apr 13, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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