EQUITIES UPDATE: Sony - positive on transition to content company


Sony - positive on transition to content company

Corporate earnings will be the biggest event for global equity markets this week with major US companies Apple, Caterpillar; amongst others, reporting. So far, over 50% of S&P 500 companies have announced 2q results with, according to FactSet, 80% percent reporting better-than-expected numbers. While of headlines have focused on the big misses from Facebook, Twitter and Netflix, at the margin, the more traditional companies are tracking well.

In Japan and Asia this week, the bulk of earnings will be in Japan, Indonesia and India. VFTP Model Thematic Portfolio holdings Sony and a few of the India banks will be reporting. Both of these positions were big outperformers in the 2q, so we will be watching for indications of future momentum.

Last reporting period, Sony’s shares fell 6% after the company missed profit estimates and forecast weaker sales and operating metrics across most of its business segments for this fiscal year. Management lowered operating profit guidance to 670 billion yen ($6.1 billion), below analysts’ forecasts of 747 billion yen and in sharp comparison to last fiscal year’s record 735 billion yen. However, since then, the stock has recovered over 20% as analysts have realized that the downgrades were overly aggressive and some of the weakness that the company will experience is either temporary or caused by transitional factors.

The biggest concern seemed to be weakness in its chip business following on from a global falloff in smartphones sales. The company guided that this unit will post a 39% decline in operating profit, after a 164 billion yen gain last fiscal year, even though sales will be rising. We think that this guidance is overly pessimistic as part of this fall will be a one off from increased capex in semi-equipment and that the division will get a boost from the launch of Apple’s next generation of iPhones later this fall.

Another concern was the forecasted weakness in its gaming business as sales from PS4 drop from 19 million units last fiscal year to 16 million this full-year period. However, much of this is a function of the company transitioning to its next generation of Play Station hardware which will take some time to roll out. However, at the same time, full-year operating profit should improve this year on the back of higher subscription growth from Play Station Plus, its online gaming offering, and the success of its game “God of War”.

Other points of weakness are its mobile phone product Xperia and its general hardware business. During their last quarterly update the company suggested it would cut back substantially on Xperia investments, perhaps a signal that eventually it would exit the business.

With the stock up 20% from its recent lows, it is obvious that most of the investor community viewed the company’s guidance as conservative and perceive there to be more upside from the business going into the year. The company also confirmed this during its recent Investor Relations Day in May.

During this update from management, when the company laid out its medium-term business plan, the news seemed relatively constructive. They upped their midpoint targets suggesting that Sony’s operating income could come in about 950 billion yen, up from a guided 720 billion yen outlined earlier this year.

The VFTP Global Thematic Portfolio will continue to hold Sony on optimism that it can continue its transition from a hardware player to a multi-dimensions software and content company and that it will be one of the biggest AI players in Asia.


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