5/18/2015

Whither Japan Stocks: Panasonic, Sony, And Sharp

Last Friday, October 11, was a strong up day for the Tokyo market.  The Nikkei 225 rose 210 yen, or 1.5%, to 14,404, a fourth consecutive up day.

Sony executive vice president and Sony Compute...

Sony executive vice president and Sony Computer Entertainment president Kazuo Hirai bows to apologize for the massive theft of personal data from users of the company's PlayStation Network and Qriocity online services, at a press conference at the Sony headquarters in Tokyo on May 1, 2011. Sony said on May 1 it would 'shortly' begin restoring its PlayStation Network and Qriocity following a major security breach that compromised millions of users. (Image credit: AFP/Getty Images via @daylife)

(Today, the 15th, it rose slightly to 14,441.)  Boosting the market has been a reversal of the yen's recent strengthening trend which was mainly an adverse market reaction to the Yellen nomination. The Japanese currency is now around 98.5 yen/dollar, close to its recent lows.

At the present level, the Nikkei 225 is off its YTD high of 15,627 set on May 22, but it is even further above the YTD low of 10,487 set on January 23. Short term moving averages have been rising.  My sense, as posted previously, is that further broad market gains are likely.

Amid Friday's general market cheer and rising prices, we note with interest the substantially different performance of the stocks of Japan's three leading consumer electronics companies, Panasonic (OTC:PCRFY), Sony (NYSE:SNE), and Sharp (OTC:SHCAY). All three are in the throes of massive and painful restructurings, on-going market evaluation of which has been the main factor driving their stock prices. Hint for what comes below:  on Friday in Tokyo, Panasonic was up 2.8%, Sony was up 1.05%, and Sharp lost 2%. Today, the 15th, the movement was Panasonic up 0.63%, Sony us 0.99%, and Sharp dropping a further 2.39%.

Last week Panasonic announced that by March 31, 2014 it would completely end production of plasma television panels and stop all related sales globally. Previously the company had targeted exiting this product business a year later, in FY 2014, which ends March 2105. It had already stopped R&D. Now the company decided it would not drag out the withdrawal and would immediately close (and sell) the one factory in Japan located in Amagasaki City, Hyogo Prefecture, still producing the panels.

According to the October 9 Nihon Keizai Shimbun, in the two fiscal years ended March 31, 2013, Panasonic had lost annually over JPY 750 billion (USD 7.7 billion) in the plasma TV business.   This volume of bleeding had to be stopped.  From the mid-2000s Panasonic invested over JPY 500 billion (USD 5.1 billion) in the Amagasaki factory. By now equipment is fully depreciated and the book value of buildings is only JPY 40 billion (USD 408 million). A write-off of this and other costs of the plasma TV business is not expected to prevent Panasonics main business from returning to profits.

Sony was also in the news on October 11, with its CEO Hirai Kazuo declaiming in an interview with the Nihon Keizai Shimbun the ambition to raise Sony's share of the world smartphone market from the current 6th place to 3rd. Hirai is nothing if not ambitious.

Hirai believes Sony can leverage its digital camera and television technology to produce a differentiated, competitive smartphone that can capture market share from Samsung and Apple. Engineers from Sony's camera and TV divisions have been transferred to its smartphone R&D division for the task of producing a market-leading product. "Good products have started to come out," Hirai said.

Sony posits that the global smartphone market will continue to expand by double digits.  In Japan Sony is competing with the iPhone being sold by NTT Docomo.  After one year, Hirai believes Sony's Xperia device is taking market share from Apple. Interestingly, reflecting that operating resources are limited, Hirai hinted that Sony would focus on the domestic and European markets and not attempt a full sales campaign the U.S. and China.

Hirai reported that restructuring continues "according to plan" in Sony's money-losing electronics and television divisions, such that a return to profitability is in sight. In TVs, the restructuring has meant winnowing models and reducing unit production while rolling out the more competitive 4K television model which it is hoped will recapture market share.

Hirai did not comment on Sony's computer sales, but reports are that the company is reducing sales forecast numbers. A Sony SVP in charge of computer sales was quoted in the October 8 Nihon Keizai Shimbun as saying that this fiscal year's sales budget of 6.2 million units, down 18% from the previous year, will be hard to achieve. The forecast had been lowered in August and will probably be lowered again. It seems that consumers have been migrating away from computers to tablets.

Which brings us to Sharp. Friday's stock price drop within an up market, and today's further decline, occurred as the company completed a public offering of 400 million shares. Some 120-128 million of the shares—the maximum allowed—were offered to foreign investors.  Price per share for both domestic and foreign investors was 279 yen.  (The stock closed on Friday at 293 and today at 286.) Sharp is netting some JPY 119.1 billion (USD 1.2 billion) from the new issue.  But the company had hoped to sell the shares for 348 yen and net JPY 149 billion.

Whither Japan's three iconic electronics brands?  No doubt they will all survive.  I do not own any of them but if I did it would be Panasonic.  As I have suggested in earlier posts, of the three companies, Panasonic is in all ways the strongest. It also seems to have been executing—and with a growing sense of urgency–the most effective restructuring strategy.  Here is some more data:

Panasonic:  ADR price $9.72.  10/15 TSE close 961.  PBR 1.85 times. Forward PER 46.85 times.  Dividend yield 1.08%. EPS yield 2.19%. TSE YTD high 993 (5/22); low 502 (1/9).

Sony:  ADR price $19.75.  10/15 TSE close 1,938.  PBR 0.88 times. Forward PER 38.84 times. Dividend yield 1.3%. EPS yield 2.57%. TSE YTD high 2413 (5/22); low 918 (1/9).

Sharp:  ADR price:  $2.89.  10/15 TSE close 286.  PBR 2.79 times. Forward PER 69.65 times.  Dividend yield: nil. Forward EPS yield 1.41%. TSE YTD high 633 (5/21); low 234 (4/3).

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