AfterTek

Sony, the electronics giant, was founded in Tokyo by Masaru Ibuka and Akio Morita in 1946 to repair radios and make small electronic parts for people. Now best-known for the PlayStation, its first popular product was an automatic rice cooker. Since the early days, the business has grown to be a world power and its recorded annual sales were about 50 billion last year.

Sony now manufactures audio, video, communications and information technology products for the consumer and professional markets. Its music, motion picture, television, computer entertainment and online businesses make it one of the most comprehensive entertainment companies in the world.

It has a 50% interest in Sony BMG Music Entertainment, one of the world’s largest recorded music companies. This year has been difficult, however, and Sony hit the headlines recently when its laptop batteries had to be recalled.  The experts below have been selected for their skills in a number of investment areas. They, or the funds they manage, may hold shares in the companies or sectors discussed.

SONY has experienced a turbulent operating environment this year. Serious setbacks have engulfed the electronics and entertainment group, which until April had seen a somewhat mini-revival.  Since then, negative newsflow and a market correction have resulted in the share price losing more than 20%.

While this weakness has provided a tempting entry point to buy into a highly cyclical stock with global exposure and several strong brands, a number of uncertainties still hang over the company.  Firstly, it is carrying out a global recall and replacement programme of its lithium-ion batteries that are used in notebook computers. In its second quarter Sony made a Y51.2 billion provision to cover the expense of this resulting in an operating loss for the period.

This debacle could lead to a loss of future revenue streams as hardware manufacturers such as Dell seek alternative battery suppliers.  Elsewhere, Sony’s electronics division remains key to future earnings, accounting for 65% of sales. TVs contributed a significant 19% of the first six months of this year’s total revenues within electronics. This means that an increasingly competitive marketplace could adversely affect future earnings streams and growth.

A further threat to the group’s growth plans are delays in the mass production of the PlayStation 3 and a price cut that had to be made in its domestic marketplace. The games console will be critical in Sony’s path to recovery.

Nintendo has seen a dramatic turnaround in its fortunes since the launch of the Nintendo DS and Sony will be hoping to emulate this.  Despite the fallout from its battery woes and increased competition in some of its core businesses, Sony still possesses a number of positive attributes including strong brand recognition, a considerable research and development capability and exciting product pipeline, most notably the PS3.

We recommend holding the stock and awaiting further visibility on the PS3 roll-out and fallout from the battery recall.  SONY’s reputation has be-come somewhat tarnished in recent years as delays in developing new products have allowed others to bring their products to the market first.

This year the company’s battery recall and delays in bringing PlayStation 3 (PS3) to the market have further harmed its image and earnings. PS3 will not be on sale for Christmas and there are also concerns regarding sufficient availability of key components.

The company recently reduced significantly its estimates for next year; net profit being cut from JPY130 billion to JPY80 billion. The extra costs of the battery recall and games development are being only partially offset by better-than-expected results in the electronics and financial services businesses.  A reduction in the sales forecast for the PlayStation Portable and poor performance in the movies business completed an uninspiring second quarter earnings report.

Another concern is that the company’s inventories rose by 43% year on year. Slower sales momentum for certain products is an income risk.  The market-leading television division has come close to breakeven. However, profitability may prove elusive for the business which has to face a price war in the key American market and oversupply.

PS3 will be a key determinant of the company’s future. Despite its (enforced) price reduction, it is expensive. It is essential it is accepted as a next-generation entertainment device and wins market share from low-end computer users.

The stock has recovered 10% from its recent low point. It stands on a p/e ratio of 20.7 against 2008 earnings projections. It does not appear undervalued given the risks it faces: lower-than-expected acceptance of PS3; lower games sales; further underperformance in movies; LCD television pricing trends; and slowing growth in digital camera sales.