On Thursday, Sony (SNE) executives spoiled the holiday cheer of Japan’s Golden Week. For the second time in four months, the Japanese electronics giant announced it had been way too optimistic about its chances of ending its losing streak. The company said its net loss for the fiscal year ended in March was 130 billion yen ($1.3 billion). In February, Sony projected a loss of 110 billion yen, after having forecast in October that the company would earn a profit of 30 billion yen.
The Japanese stock market took the bad news in stride. In early trading today, Sony shares fell as much as 4.4 percent, the biggest intraday decline since Nov. 1, but by the end of Friday they had pared losses to just 0.5 percent.
As the sanguine reaction from investors indicates, amid the gloom there may be some reason to be optimistic. Sure, the numbers look bad now, but at least Sony is finally getting serious about its need to restructure. For instance, the company has said it will unload its PC business. That involves some short-term pain. In its announcement yesterday, Sony revised its operating profit estimate to 26 billion yen, down from the previous target of 80 billion yen.
One Sony watcher looking on the bright side is Masahiko Ishino, an analyst with Advanced Research Japan in Tokyo, who wrote in a report published today that the lower target reflects in part the “additional expense of exiting the PC business.”
With Sony’s new chief financial officer, Kenichiro Yoshida, having made the decision to book restructuring costs now, Eiichi Katayama of Bank of America Merrill Lynch (BAC) agrees the bad numbers are good news. “We see the news as positive,” he wrote in a report published yesterday. “The company’s real underlying value needs to be brought to the fore by not postponing restructuring.”
Sony has yet to take the biggest step: finally throwing in the towel on its TV business. Still, that the company is starting to move in the right direction could create a buying opportunity for investors looking for a repeat of the surge enjoyed by Japanese companies including Panasonic (6752:JP) and Hitachi (6501:JP) that are further along in the restructuring process. “We believe that the new CFO will aggressively push through structural reforms,” writes Ishino, “implementing fundamental surgical treatment rather than going for an easy profit recovery.”
There’s no doubt Sony needs the surgery. The company compares poorly with rival Panasonic, which has been far more aggressive in its moves away from businesses where it can’t compete against the likes of Apple (AAPL), Samsung Electronics (005930:KS), and low-cost Chinese rivals. “Panasonic is less reliant on the highly competitive and low-margin consumer electronics sector,” Moody’s (MCO) wrote in a report published last month. Consumer electronics sales make up about 25 percent of Panasonic’s total revenue, while they account for almost two-thirds of Sony’s total. “This higher exposure is weighing on the recovery of Sony’s profitability,” according to Moody’s. “Sony’s margins will remain weak and volatile as its major consumer electronics businesses—TVs, mobile, and digital cameras—face continued pricing pressures.”
Sony executives may have earned a pass from the market this time. But if they don’t address the many problems with the company’s TV business, come the next round of disappointing results, investors may not be so forgiving.