A Post-Fukushima Rebound for Toshiba

After the Mar. 11 earthquake and tsunami, few Japanese companies were in worse shape than Toshiba. The Tokyo-based maker of semiconductors, computers, and televisions is also one of the world's leading makers of nuclear power plants, and with the Fukushima crisis putting that industry in peril worldwide, investors dumped the stock. Toshiba's share price plunged 27 percent in the week following the disaster, making its shares the second-worst-performing on the Nikkei index. Only Tokyo Electric Power, the operator of the Fukushima nuclear power plant, did worse.

Since then, Toshiba's stock has shown surprising resilience, a recognition of the company's underlying strength. The stock is up 15 percent since Mar. 18, the ninth-best performance on the Nikkei, and on May 10, Toshiba announced that profits for the year would climb to a record 140 billion yen ($1.7 billion).

Toshiba can thank Steve Jobs for its recovery. The Japanese company is the world's second-largest producer of Nand flash chips, behind only Samsung, and is a major supplier to Apple (AAPL) for the iPad. The Toshiba plants in central and southern Japan making those chips were largely unaffected by the earthquake and tsunami. Toshiba Mobile Display, a fully owned subsidiary, makes small LCD panels for the iPhone and other products, and that double play of memory chips and displays puts Toshiba in the electronics industry's sweet spot. "The expansion of Nand and small-panel demand from smartphones and tablets will help support a longer profit recovery for Toshiba," CLSA Asia-Pacific Markets analysts Christian Dinwoodie and Nanako Imazu wrote in a May 12 report.

Chips and displays aren't the only products contributing to Toshiba's revival. The company ranks fifth among the world's PC vendors, and while industry leaders such as Hewlett-Packard (HPQ), Acer, and Dell (DELL) struggle with falling shipments, Toshiba's computer business, led by its Portégé laptops, is on something of a roll. Its PC shipments grew in the first quarter by 5.3 percent worldwide, according to data from market research firm Gartner (IT). Of the top five PC vendors, only Lenovo grew faster than Toshiba. (Shipments from HP, Acer, and Dell all shrank.) The company did even better in the U.S., with shipments jumping 10.9 percent, second only to Apple's 18.9 percent.

Post-tsunami spending in Japan could give Toshiba a further boost. Fumio Muraoka, corporate senior executive vice-president, told reporters on May 9 that the company expects to benefit from reconstruction demand for TVs, refrigerators, and air conditioners in the current fiscal year. Toshiba also sees growth in demand in some of its other businesses—such as water treatment systems and electrical substations—in the region hardest hit by the disaster.

Can Toshiba keep the turnaround going? For all its strength, the company's semiconductor business has lower profit margins than its South Korean rivals, largely because the strong yen makes Japan a more expensive place to operate chipmaking facilities than Korea. Toshiba also is struggling in some of its other businesses. It lags far behind market leaders Western Digital (WDC) and Seagate (STX) in disc drives, and while it is strong in Nand flash, it's weak in specialized semiconductors such as logic chips. The non-Nand business "has been bleeding the last couple of years," says David Rubenstein, an analyst in Tokyo with MF Global FXA Securities who would like to see Toshiba jettison its low-margin businesses. "They need to buckle down and cut costs," he says, by outsourcing production to foundries and selling low-margin businesses. That isn't easy in Japan, where companies are used to making things themselves.

Another big concern is the future of the nuclear business. For now the company can count on a healthy backlog of orders from China, but with the future of nuclear power still uncertain, Toshiba is making moves into other energy sectors. On May 10 it signed a preliminary deal with Charlotte-based clean-energy company Babcock & Wilcox to develop thermal and solar technologies. It's trying to become a player in the fast-growing market for smart-grid equipment for electricity networks, too: On May 19, Toshiba announced a $2.3 billion deal to buy Landis&Gyr, a Swiss electronic metering company.

The bottom line: Toshiba is making record profits from its chip business. To keep growing, it's moving aggressively into alternative energy technologies.

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