Fitch Cuts Sony (SNE) to "Junk" — Breakup More Likely


Sony Corp. (NYSE: SNE) has not benefited from a new CEO. Its struggles to right its consumer electronics business have faltered with the commodity pricing of television screens. It PS3 franchises remain under pressure from Microsoft Corp. (NASDAQ: MSFT) Xbox product which have received heavy promotion with the addition of Windows 8 to them. And, rival Nintendo has just launched it Wii U product which will get massive marketing support.

Sony is left with its tiny PC and cellphone business, neither of which have market share, as they try to compete with the likes of Apple Inc. (NASDAQ: AAPL) and Samsung.

Sony does have its studio business, which is hostage to the success or failure of blockbuster films.

Credit agency Fitch looked at the aggregate carnage and downgraded Sony's debt to junk while keeping its creditwatch status as negative:

Fitch Ratings has downgraded Sony Corporation's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to ';BB-' from ';BBB-' and maintained the Outlooks at Negative.

In specific:

The downgrade reflects Fitch's belief that meaningful recovery will be slow, given the company's loss of technology leadership in key products, high competition, weak economic conditions in developed markets and the strong yen. Excluding Sony Financial Holdings (SFH), for the financial years ending March 2013 and March 2014 (FYE13, FYE14), Fitch expects operating EBIT margins to be negative or minimal and funds flow from operations (FFO)-adjusted leverage to be above 4.5x. Significant recovery in FYE15 will depend on the success of the turnaround plan which will be a challenge given the company's circumstances.

Fitch believes that continuing weakness in the home entertainment & sound and mobile products & communications segments will offset the relatively stable music and pictures segments and improvement in the devices segment which makes semiconductors and components.

Sony's share price reflects Wall St.'s abandonment of the stock. The consumer electronics giant, the Apple of the 1990s, is left with few options. Among them is the spin out of the studio business to shareholders. The division has nothing to do with the balance of the company. And, Sony must decide if it wants to sell its lowest margin electronics operations to interests in Korea of China

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Analyst Calls Tagged: AAPL, MSFT, SNE