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Sony: Undervalued at $14 Billion Market Capitalization
Posted by: Carmine Romano (IP Logged)
Date: May 21, 2012 05:03PM

Sony (SNE)'s stock price is at a 31-year low and now has a $14 billion market capitalization which I believe undervalues the company at these prices.

I became interested in the stock market indirectly through a movie called Star Wars in 1977. As a teen, I was anxious to see the movie Star Wars and after seeing it decided to buy the stock of 20th Century Fox on June 20, 1977, believing it would be a hit for the company. The stock doubled in a year.

Today, most studios are too large to bank on one movie to make the stock double. LionsGate (LGF) stock price moved on The Hunger Games and Disney (DIS)’s stock did well when The Avengers opening weekend results were greater than expected.

This leads me to Sony Corp, the company that invented the Walkman, the ancestor of Apple's (AAPL) IPod touch. Sony’s stock has been beaten down by investors as many have become non-believers in Managements plan to turn around its consumer products division. Fiscal year ending March 31, 2012, resulted in record sales of $87 billion with a record $5.7 billion annual net loss. Sony blamed the loss on the “unfavorable impact of foreign exchange rates, the impact of the Great East Japan Earthquake and the floods in Thailand, and deterioration in market conditions in developed countries." Sony did make $2.5 billion in operating profits from financial services, music and movies.

A brief look at Sony Corp:

According to their website: Sony Corporation is a leading manufacturer of audio, video, communications and information technology products for the consumer and professional markets. Its motion picture, television, computer entertainment, music and online businesses make Sony one of the most comprehensive entertainment and technology companies in the world. Sony recorded consolidated annual sales of approximately $87 billion for the fiscal year ended March 31, 2012, and it employs 168,200 people worldwide. The company is headquartered in Japan.

Business segments listed in the financials include:

1) Customer Products and Services
2) Professional Devices and Solutions
3) Pictures
4) Music
5) Financial Services
6) Sony Mobile Communications

Content (movies, TV and music) have caught a bid from Subscriber Content Streamers like Netflix(NFLX), Amazon (AMNZ) and Crackle. Sony owns Columbia Pictures,which includes Spiderman, Men in Black, James Bond Franchises and many other movies that are very desirable to content streamers.

A recent article by the Financial Times, "Sony: Time to Face the Music” by Andrew Edgecliffe-Johnson, indicated that the music and picture segments may be worth $10 billion. With the ADRs at $14, the stock has a market capitalization of $14 billion.

In the next six months, Sony has three movies that could boost the stock price.

Men in Black 3 - Opening May 25, 2012

Spider-Man 4 - Opening July 3, 2012

SkyFall – James Bond - Opening Oct. 24, 2012

Below is a historical performance of Sony stock price with the prior Spider-Man movies

One Month Prior Opening Weekend Change
Spider-Man 2002 52.46 54.02 3.0%
Spider-Man 2004 34.7 38.03 9.6%
Spider-Man 2007 51.9 55.46 6.9%
Spider-Man 2012 ? ? ?


Spider-Man 3, currently, holds the fifth position of the largest openings of all time.

Will Spider-Man 4's opening weekend be a catalyst to boost Sony's stock price?



Spider-Man is not the superhero answer to Sony Corp.'s problems with its consumer division, but it does have the power to elevate the stock heading to opening night. With the stock at a 31-year low, $11 billion in cash and $9 billion in debt, an unparalleled content library, a $10 billion market value of its music and pictures segment, and management’s determination to turn around the consumer business, I believe Sony is
undervalued at this price.


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: superguru (IP Logged)
Date: May 21, 2012 07:50PM

Are you suggesting SNE as short term trade with one or more of these movie success as a catalyst?


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: Carmine Romano (IP Logged)
Date: May 21, 2012 08:18PM

Historically, the short-term trade has worked but you have to consider the economic and market risks during the June to July period. I believe long term, at 14, this is a good entry point, risking maybe a 25% decline. A successful movie this summer will regain the attention of investors who are ignoring the stock now , thus may act as a catalyst to increase investor awareness of its content value and confidence in the company.


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: kfh227 (IP Logged)
Date: May 21, 2012 09:21PM

how much fcf will these 3 ,ovies make? there are millions in dev costs, marketting, etc. after all is said and done, what is breakeven in box office sales for eacn movie? can this type of performance be normalized over many future years to detrmine normalized FCF frommovie releases?if so, what number are we looking at?


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: gpsir (IP Logged)
Date: May 22, 2012 01:49AM

Authors Quote : "With the stock at a 31-year low, $11 billion in cash and $9 billion in debt, an unparalleled content library, a $10 billion market value of its music and pictures segment, and management’s determination to turn around the consumer business, I believe Sony is undervalued at this price."

With this author has come to conclusion that Sony is undervalued. Great, Great. Great, Great Analysis. Keep it up for this write up.


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: alleygator (IP Logged)
Date: May 22, 2012 05:51AM

Sad to say, but the quality of Gurufocus articles have started to decline.


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: Carmine Romano (IP Logged)
Date: May 22, 2012 07:50AM

KFH227, I have a proprietary FCF model, making adjustments to various items which are not typically considered in your average credit analysis.

All,
Always do you own homework and do not invest in a company just because an article says you shoud. I had a friend Vinnie who did just that and lost a boat load of money...


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: mcwillia (IP Logged)
Date: May 22, 2012 01:05PM

Sony's one really profitable business, its financial business (including insurance) is a ticking time bomb, a sliver of equity counterbalancing huge portfolios of questionable bonds (with little yield), poorly or blindly underwritten loans, and dangerous underwriting obligations. When the yen finally collapses or is pushed down intentionally, this area of Sony will pull down any remaining value in the remainder of the company. One look at the exposure here shows how it swamps Sony's equity and meager profit streams.

As for movies, movie-making is a bad business intrinsically, one requiring large capital outlays for uncertain returns, one which must be re-invented or rehabilitated each and every year, and one which is under constant I.P. threat as each wave of digital innovation destroys the moat. The music business is even worse in this regard. It can throw off some royalties for a time, but it is as subject to 'depletion' as oil master limited partnerships. Nothing of permanent value for Sony there.

The game business is a high competition sector too, essentially mirroring the economics of the movie business with a bit more I.P. protection. It is also a 'must-be-right-every-year' business, requiring skill at getting not only the game part right, but the device part. It is a tough business which does not deserve to be capitalized at a high multiple. Add to this the demographic profile of Sony and it becomes a bad business, i.e. the creative juices come from a nation which systematically stifles and punishes creativity, and is built in large part by a workforce which is globally uncompetitive at current currency rates. No thanks, I'll pass on that business.

The medical business? Nice business, but deserves to be a division of Becton Dickenson, Bard or Medtronic. It suffers from a conglomerate neglect. Maybe Takeda could buy it and try to attain a J&J style posture. Actually, that would be a nice fit. On the down side, the Japanese government will soon be reducing (again) the national health payments and increasing patient co-pays, which will hit the medical business hard. Chinese competition will nip at the low end products, while the far more nimble and focused Becton and Bard beat up Sony on the high end.

TV's and consumer electronics? Faggeddaboudit.

Sony is only a good investment if you are considering long-dated CDS or a long dated Leap, depending on your appetite. If you like Sony as an equity, do it this way...do it yourself by buying Disney, Aflac, Becton Dickenson, Apple, and Samsung. This lets you play effectively and profitably in Sony's markets without being slaughtered by Sony's disastrous management, market, posture and prospects.

PS: As for a yen collapse, don't assume this will revive Sony. It would make Sony's exports more price competitive, but the implosion of the financial businesses would by that time have already wiped Sony out several times over.


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: Carmine Romano (IP Logged)
Date: May 23, 2012 06:32PM

Mcwilla, Nice analysis.

ALL, As a reference another Mavel Comic superhero movie "The Avengers" reached $1 Billion in box office Worldwide.

According to The Hollywood Reporter, Sony Pictures India will release the Spiderman 3D film on June 29 in India, before the US July 3rd release.


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Re Sony Undervalued at 14 Billion Market Capitalization
Posted by: Carmine Romano (IP Logged)
Date: May 24, 2012 04:55PM

A Sony spokesman said he expected "Men In Black 3" to have a worldwide opening of about $200 million. According to Intrade.com market , Men in Black 3 has an 80% chance to gross of $75 mil this weekend in the US only.


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