Inside Wall Street: Why Sony Looks Like a Snooze for Investors

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Gene Marcial's Inside Wall StreetOnce a leader in consumer electronics, Japanese giant Sony (SNE) has turned into a timid follower. But maybe the fading stock is now a buy. After all, Wall Street analysts are still generally bullish. They could be wrong.

Although Sony is still in the red, seven of the major Street analysts who follow it recommend buying the stock, and three rate it a hold. Only Michael Souers, analyst at Standard & Poor's, advises dumping the stock, which has tumbled from a 52-week high of $40.45 a share on Mar. 23 to $30 on May 18. This lone bull insists he's on the right track.

Let's first take a look at why the other analysts are hopeful. While the revenue outlook for fiscal 2010 (ending Mar. 31) is disappointing, "we are upbeat about Sony's restructuring efforts," says Mark Harding, analyst at investment firm Maxim Group, who rates the stock a buy with a 12-month price target of $42. The improvements in TV and game operating profitability in fiscal 2009 should "assuage concerns about the validity of the restructuring efforts this time," says Harding.

Also bullish is Daniel Ernst of Hudson Square Research, who says that as a leading producer of consumer technology, film, music and interactive entertainment, Sony is "uniquely well positioned to deliver converged digital content." But he's also concerned about new entrants in the game, such as Apple (AAPL).

"We Are Lukewarm"

With its "very well integrated hardware and services approach, Apple represent a growing threat" to Sony, he argues. The consumer electronics market is "extremely competitive, with material pricing pressures," warns Ernst. And with the absence of earnings, "It's more difficult to value Sony," he adds. Ernst's price target is based on his estimated earnings for fiscal 2011 of $2.52 a share, which assumes a 4% operating margin.

But some analysts who rate Sony a hold have real concerns. "We are lukewarm on these neutrally ranked ADRs [American depositary receipts] at present," says Justin Hellman, analyst at investment research outfit Value Line (each ADR represents one share). Product development is critical to Sony's future, he notes, and he has high hopes for Sony's line of e-readers, which appear to be gaining ground. But Apple's new iPad is making a big splash in this market.

Apple will "keep Sony on its toes," says Hellman. So, he says it's best to defer committing to the stock "until business trends improve further and stepped-up R&D efforts start to bear fruit."

High Hopes for Smart TV

S&P's Souers is, in fact, concerned about the lack of any new creative products at Sony. Once the global leader in innovative products, Sony has lagged and become a follower in consumer electronics. "The lack of innovative, revolutionary (rather than evolutionary) products in the pipeline will hurt demand in this challenging macroenvironment," says Souers. The only new product on the horizon is a "smart TV" that Sony is scheduled to launch along with Google (GOOG) and Intel (INTC). The product is an attempt to integrate the Web with TV, Blu-ray players and set-top boxes.

However, Souers says widespread consumer malaise will continue well into fiscal 2011 and dampen demand for new products. Sony's cost-cutting plan should lead to continued near-term margin improvement, he concedes. But he's concerned that mass adoption of any new product would take time.

Souers has lowered his earnings estimate for the first quarter of fiscal 2011 to 72 cents a share from 91 cents, and he's set his forecast for all of fiscal 2011 at $1.15 a share. For fiscal 2010 ending Mar. 31, Souers figures Sony will earn 46 cents a share.

Despite Sony's projected turn to profitability, Souers doesn't think the stock is attractive, particularly in the market's current volatile mood. "Sony's stock remains expensive," he notes, trading at 65 times his estimated fiscal 2010 earnings and 26 times his 2011 profit forecast. So he has kept his 12-month price target at $29 a share.

Bailing Out


Not surprisingly, some big institutional holders have unloaded some shares, including its largest stakeholder, Dodge & Cox, which sold 612,950 shares as of March 31, leaving its holdings at 3.54%. Others who sold included PrimeCap Management, Morgan Stanley, Brandes Management, and Barclays.

Selling by the large institutional investors isn't always a negative: Contrarians can interpret that as an opportunity to buy. In this particular case, however, it may be best to stay clear of the wave of selling by the big boys.
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