Strong Earnings Are Recharging Once-Weak Sony


After languishing for years, consumer electronics giant Sony Corp. and its stock are again showing the heady growth that made the Japanese company a household name around the globe.

Sony is enjoying an earnings spurt lately--if one excludes the negative impact of the Japanese yen’s rising value against the dollar and other major currencies. The gains are being powered by several factors, including strong holiday sales of its electronics gear, especially its industry-leading PlayStation video game player.

There’s also growing excitement about the prospects for Sony’s next generation of the player, PlayStation 2, which is due out in March in Japan and then is expected to reach North America in plenty of time for Christmas 2000.


Later versions of the player also are expected to provide connections to the Internet, so that consumers can play games online and download games and other entertainment content from the Web.

Japan’s stock market overall has rebounded this year: The benchmark Nikkei- 225 index is up 36% year-to-date on the recovering strength of the nation’s long-suffering economy. Yet the Nikkei remains a whopping 52% below its record high of 38,915.87 reached 10 years ago Wednesday.

By contrast, Sony’s American depositary receipts--the U.S. version of its stock--have nearly quadrupled in price over the past 12 months, and gained $13.88 to a record $281.38 on the New York Stock Exchange on Wednesday.

The shares have gotten an extra kick lately after Sony announced a 2-for-1 stock split to be effective in May, its first split since late 1991.

Despite the stock’s gains, several analysts are still recommending that investors buy the shares. “We simply think Sony’s earnings are going to continue to move up,” said Peter Wolff, an analyst at investment firm ING Barings in New York.

Likewise, analyst Takatoshi Yamamoto of Morgan Stanley Dean Witter in Tokyo rates the stock a “strong buy” in good part because Sony will be generating “peak income from the PlayStation 2” during its fiscal years 2002 and 2003. (Sony’s fiscal year ends March 31.)


The upswing at Sony has been a long time coming.

After the Nikkei index peaked in 1989 and Japan’s economy began sliding into a severe recession, Sony’s shares slumped as well and the company’s performance eroded during much of the ‘90s, though it remained an electronics power with such popular items as its Sony Walkman music player.

In fact, from late 1989 through 1998, Sony’s stock showed a gain of only 30%, or slightly more than 3% a year on average--an advance that struggled merely to keep up with inflation.

But Sony’s fortunes began improving this year as several events unfolded. Sony in March announced a major restructuring to become more efficient and to cut costs, and in the same month it unveiled detailed plans for PlayStation 2.

Then in July it posted fiscal first-quarter earnings, surprising analysts who had expected a loss. And in October, it announced fiscal second-quarter profit that, excluding the yen’s appreciation against other currencies, surged 25% from a year earlier on sales that rose across all of Sony’s divisions.

It also became clear this fall that PlayStation was generating big gains for Sony. Although the game segment accounts for only 8% of Sony’s revenue, it kicked in 37% of the company’s profit in the six months ended Sept. 30, and will likely make an even bigger impact in the holiday-shopping quarter ending Friday.

However, Sony’s recent results aren’t impressive when the yen’s gains against the currencies of Japan’s major trading partners are included. Because of the yen’s advance, Sony’s profit in dollars for the six months ended Sept. 30 fell 25% from a year earlier, to about $607 million, on an 8% drop in sales to $29 billion.


Besides the PlayStation and related game software, Sony is enjoying strong sales of its camcorders, stereo equipment and DVD players. And electronics continue to be the backbone of Sony: The group still accounts for 72% of Sony’s sales and 39% of its earnings.

Sony also has interests in recorded music and in Hollywood, where the company is struggling to generate a consistent list of box-office successes.

Sony moved into Hollywood’s film and television industries with a bang in 1989, when it paid $3.4 billion to acquire Columbia Pictures and its sister studio, TriStar Pictures. But the investment quickly soured, sparking billion-dollar losses and years of management turnover at the studios.

Much of that is behind Sony, but the studios are still posting mixed results. In its fiscal second quarter, Sony scored with the movie “Big Daddy” but suffered undisclosed losses on such films as “Jakob the Liar” and “Muppets From Space.”

Sony is hoping to rebound with “Stuart Little,” but it’s too early to tell whether the recently released movie about a talking mouse will be a profitable hit.

For all the attention lavished on the studios, they account for a minor part of Sony’s business: About 7% of total revenue and 11% of its earnings. Regardless, rumors periodically surface that Sony might shed the studios--rumors Sony adamantly denies.


There’s also recurring speculation that Sony will follow the lead of other studios and strike some partnerships to tie its movie studios closer to major broadcast and cable-TV operators, so as to give its filmed content wider distribution.

A major deal hasn’t been struck as yet. But Sony has shown it’s willing to make alliances. In September, for instance, it joined with cable-TV operator Cablevision Systems Corp. to provide Cablevision’s New York-area customers with an array of entertainment choices by using a new Sony-built set-top box.

Yet some analysts are guessing that Sony might generally bypass those operators and instead develop more of its own electronic products that would enable its movies, TV shows, music and other content to reach a wider following.

In the meantime, the mania for technology stocks worldwide is helping keep Sony among the leaders in the Japanese stock market--and on the New York Stock Exchange.

Other Japanese tech stocks that trade on the NYSE include Hitachi, which makes consumer electronics as well as industrial equipment, and which has soared 166% from its 52-week low; Kyocera, which operates in the semiconductor sector and telecom equipment, and is up 483% from its 52-week low; and TDK, a maker of magnetic tapes and floppy discs, up 113% from its low.


Japan’s Split Market

While the main Japanese stock index, the Nikkei-225, remains more than 50% below its peak reached 10 years ago this week, shares of leading Japanese technology stocks have rocketed this yearled by Sony Corp. How the Nikkei, and Sony shares, have fared since December 1989:Source: Bloomberg News



Tech Mania, Japanese-Style

Japanese technology stocks, like their U.S. counterparts, have been red-hot this year. Here’s a look at performance of U.S.-traded shares of major Japanese companies, which generally track the performance of the companies’ main shares in Tokyo:


Ticker 52-week Wed. Wed. Gain from Stock symbol low close change 52-week low Kyocera KYO $44.63 $260.00 +$20.38 +483% Sony SNE 65.50 281.38 +13.88 +330 Hitachi HIT 58.88 156.81 --1.13 +166 Nippon Tel. NTT 36.00 87.38 +1.38 +143 TDK TDK 67.00 142.63 +18.63 +113 Canon CANNY 19.25 40.25 --0.50 +109 Toyota Motor TM 45.94 95.50 --0.88 +108 Matsushita Elec. MC 157.50 278.19 --10.94 +77 Pioneer PIO 16.00 27.88 --0.38 +74 Honda Motor HMC 64.06 75.00 --1.75 +17 Nikkei-225 index 13,232 18,810 +27.06 +42


Source: Reuters; Times research