Is Matsushita Losing Its Mojo?
Has Matsushita Electric Industrial's (MC) growth engine started to sputter? It's a question that a growing number of financial analysts are asking about the company's TV business, and CEO Fumio Ohtsubo will be hard-pressed to come up with answers.
On July 25, the Japanese technology giant reported first-quarter profit gains for the sixth straight year. But that was almost an afterthought to bad news a day earlier, when the company revised downward its forecast for full-year earnings after announcing ailing subsidiary Victor of Japan's (JVC). multimillion share offer, a precursor to the unit's likely spin-off. The revision spooked investors and triggered a selloff that left the company's shares 3.6% lower.
Among the biggest worries: lower-than-expected flat-screen TV sales in North America. Ohtsubo himself had expressed concern earlier this year that plasma TV makers were forfeiting ground in the face of a marketing blitzkrieg from liquid-crystal displays, the rival flat-panel technology. That observation from the man whose company has one-third of the global plasma TV market now seems prescient.
Yen's Weakness Helps
Of course, nobody thinks plasma is about to get ousted completely by LCDs. Plasma producers still rule in big-screen TVs because they can make large panels at a lower cost than LCD producers can. But the market outlook doesn't seem as sunny as Matsushita had hoped, and LCD makers are quickly closing in.
In the fiscal first quarter, Matsushita's operating profit rose 13%, to $615 million, despite a modest 5% gain in sales, to $18.6 billion. Strong sales of digital cameras, video cameras, DVD recorders, and household appliances, along with the yen's weakness, were behind the gains (see BusinessWeek.com, 2/1/07, "Matsushita's Wary Plasma Dominance").
But full-year profit and sales forecasts were revised down 5%, to $3.97 billion, and $73.1 billion, respectively, due to the accounting change after unit JVC issued $290 million worth of shares to Japanese consumer electronics company Kenwood (KNWCF) and Kenwood's biggest shareholder, the Sparx Group, a fund.
At first glance, the TV business doesn't look bad. From April to June, Matsushita sold 800,000 plasma TVs, a 31% improvement over the 610,000 sets it sold in the same three-month period last year. Overall flat-panel TV revenues were up 2% as well. But the company needs to pick up the pace if it's to reach its target of shipping 5 million sets this year—a 43% gain from 3.5 million.
'On Track' for Targets
Another troubling trend: a fall in first-quarter TV revenues in Japan and North America. Matsushita's chief financial officer, Makoto Uenomura, blamed competitive prices, and said prices had fallen 29% in the quarter from the same period a year ago. But Uenomura said he was confident Matsushita was "on track" to hit its targets, and dismissed rising inventories. "We're just switching to a new lineup of high-definition TVs in Europe and the U.S. so the inventories you're seeing are new products, not old," Uenomura told reporters. "We're not worried."
Maybe they should be. Even before Matsushita's first-quarter numbers were released, some analysts had already lowered their volume sales estimates. Morgan Stanley (MS), for one, challenged Matsushita's forecast that the global plasma TV market would expand to 12.5 million sets this year, from around 9.7 million in 2006. The brokerage has global plasma TV sales at between 10 million and 11 million.
In a July 5 report, Credit Suisse (CS) analyst Koya Tabata put Matsushita's sales at closer to 4.5 million sets through the March, 2008, fiscal yearend, 500,000 units less than he'd previously predicted. He also slashed his forecast for the next year by 1 million, to 5.5 million units.
That doesn't augur well for Matsushita. The company's Panasonic-brand TVs and other audio-video products accounted for 44% of Matsushita's overall sales and 48% of operating profits last fiscal year, and the company is counting on those divisions to be big contributors again this year.
LCD Producers Muscling In
Other plasma makers are feeling the pain, too. Last week, LG Electronics, the world's second-largest plasma display maker, said its display division (which includes plasma TVs) posted a 24.2% operating loss because of plummeting plasma panel prices, although the overall company reported its highest quarterly net profit in three years (see BusinessWeek.com, 7/10/07, "The LCD Flat Panel Rises Again"). Third-ranked Samsung SDI said its April-June results took a direct hit from falling TV prices, posting a net loss of $151 million, vs. a $33 million net profit a year earlier.
What's worrisome for plasma makers is that big LCD producers such as Samsung Electronics, Sony (SNE), and Sharp (SHCAY) want a piece of the action in TVs with screens bigger than 40 inches (see BusinessWeek.com, 1/17/07, "Plasma vs. LCD: The Battle Heats Up"). They have built state-of-the-art factories to churn out bigger sheets of glass from which bigger screens can be cut. They're also offering their sets in ultraclear high-definition, which could lure buyers swapping their old, bulky picture-tube TVs or upgrading from a smaller flat panel. That leaves the plasma camp with two options: keep building new plants of their own to make even bigger TVs or cut prices faster than they'd like, to stay a step ahead of LCDs. But the latter would shrink profit margins further, and Matsushita's plasma panel business only has 3% margins, analysts say.
For now, plasma has a price advantage. According to market research firm Displaysearch, the average price for a 42-in., high-definition plasma set was $1,455, vs. $2,524 for a 45- to 47-in. LCD TV. But that's not likely to stop the encroachment from LCDs. ISuppli analyst Sweta Dash says LCD makers already rule the roost in the 40-in. range and smaller. They also have the advantage of diversifying their product mix. "LCD makers have a buffer because" their products are used in a wide variety of applications—TVs, notebooks, and PC monitors, Dash said.
Credit Suisse predicts plasma makers will only sell 5.9 million sets with screens smaller than 42 inches this year, down from 7.1 million last year. That tally could continue to shrink over the next two years, as bigger screens become plasma's biggest market. Question is, how much bigger will consumers want their TVs?