As soon as Sony (SNE, Financial) revealed its quarterly results, its shares plummeted. The reason was clear: Sony's operating profits came 73% below consensus estimates. Even when the deterioration in the electronics segment was to be expected, not many analysts were ready to see a red figure for Sony's movie business – which I think it has been an extraordinary one-off event that can be explained by box office misses. I think that after having formally rejected Daniel Loeb 's (who owns 7% of the company's shares) proposal to spin off the entertainment business, the Japanese conglomerate is ready to make a few changes in order to push its share value. I truly believe that Sony's shares could rebound going forward as management takes a few steps towards the right direction.
The Future Ahead
Sony's future will go around a few themes. First of all the company will continue to improve disclosure regarding its valuable music and motion picture divisions. Secondly, Sony will have to make a full restructuring of its computer and TV businesses while focusing on the launch of its Play Station 4 gaming console which, along with the company's growing smartphone business (which grew sales by 36%), could be a powerful force to help the company drive top line growth for the first time in six years. In addition, the game business could also see growth in service profits from monthly charges and ameliorated online offerings.
Furthermore, I think Sony also has assets it could sell such as its M3 stake and its head office building while increasing the company's stake in the financial services segment, which saw a 26% jump in its operating profits.
On Valuation
Sony is simply cheap. Taking into account a sum of the parts valuation, I am sure that Sony's equity is worth significantly more than $18 billion – which is the company's current total market capitalization. Looking at multiples, Sony also looks significantly cheap. The company trades at 80% its book value when the sector's average is close to 150%. The company's EBITDA multiples also looks relatively low compared to close peers. Sony sells for 4 times 2014 EV/EBITDA while a competitor such as Panasonic (PCRFY, Financial) sells for 5 times 2014 EV/EBITDA. As I always mention, “price is what you pay and value is what you get”. In Sony's case, you would be buying what I consider to be a non very well organized business. That said, the conglomerate has many extremely valuable parts such as its gaming and entertainment divisions that should fetch a high multiple if they were spin off from low margin businesses like TVs and video cameras.
Bottom line
Sony's management should follow Loeb's advice and separate its most valuable segments in order to boost shareholder value, which is what they are being paid to do. I believe a (slow) journey towards that path has already started since the company is finally taking some measures in such direction. At least, Sony is now disclosing more detailed information about its separate entities. On top of this, the company should continue to benefit from a weaker yen and prime minister Abe's structural reforms. I am a bull on the name, despite its poor quarterly results.
The Future Ahead
Sony's future will go around a few themes. First of all the company will continue to improve disclosure regarding its valuable music and motion picture divisions. Secondly, Sony will have to make a full restructuring of its computer and TV businesses while focusing on the launch of its Play Station 4 gaming console which, along with the company's growing smartphone business (which grew sales by 36%), could be a powerful force to help the company drive top line growth for the first time in six years. In addition, the game business could also see growth in service profits from monthly charges and ameliorated online offerings.
Furthermore, I think Sony also has assets it could sell such as its M3 stake and its head office building while increasing the company's stake in the financial services segment, which saw a 26% jump in its operating profits.
On Valuation
Sony is simply cheap. Taking into account a sum of the parts valuation, I am sure that Sony's equity is worth significantly more than $18 billion – which is the company's current total market capitalization. Looking at multiples, Sony also looks significantly cheap. The company trades at 80% its book value when the sector's average is close to 150%. The company's EBITDA multiples also looks relatively low compared to close peers. Sony sells for 4 times 2014 EV/EBITDA while a competitor such as Panasonic (PCRFY, Financial) sells for 5 times 2014 EV/EBITDA. As I always mention, “price is what you pay and value is what you get”. In Sony's case, you would be buying what I consider to be a non very well organized business. That said, the conglomerate has many extremely valuable parts such as its gaming and entertainment divisions that should fetch a high multiple if they were spin off from low margin businesses like TVs and video cameras.
Bottom line
Sony's management should follow Loeb's advice and separate its most valuable segments in order to boost shareholder value, which is what they are being paid to do. I believe a (slow) journey towards that path has already started since the company is finally taking some measures in such direction. At least, Sony is now disclosing more detailed information about its separate entities. On top of this, the company should continue to benefit from a weaker yen and prime minister Abe's structural reforms. I am a bull on the name, despite its poor quarterly results.
