CAPScall of the Week: Sharp


For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm taking a closer look at Sharp .

What Sharp does
Sharp probably needs little introduction for you tech-savvy individuals. It's one of the big three Japanese electronics companies and manufactures everything from televisions and Blu-ray players to the LCD screens used in today's smartphones.

Sharp's most recent quarter was a nightmare right out of a Stephen King novel. It reported a quarterly loss of $3.12 billion as revenue slid 4% to $8.1 billion. As has become the norm in recent quarters, Sharp suffered numerous one-time writedowns, including $1.06 billion in restructuring charges and $764 million in deferred tax assets. Sharp also announced it'd be laying off 5,000 people, its first layoff announcement since 1950.

The competition
Sharp is stuck in a tough spot, competing against two very large peers within Japan -- Panasonic and Sony -- as well as other growing electronics manufacturers outside of Japan.

Within Japan, for Sony, Panasonic, and Sharp, things almost couldn't be any worse. The three electronic giants have struggled mightily as their efforts to expand in the late 2000s to capture what seemed to be an exponential growth trend in television and LCD sales has left all three saddled with excess capacity amid a market with an abundance of supply. All three are doing what they can to restructure their operations, but the result has been monstrous quarterly losses. Sharp's second-quarter loss of $3.12 billion is peanuts next to Panasonic, which recently wrote down $10.2 billion, or Sony, which has an eight-year streak of television segment losses!

The other problem Japanese electronics manufacturers are having is maintaining competitive pricing around the globe when cheaper labor in China, India, and other emerging markets allow for pricing advantages. At least within the U.S., consumers are showing they're no longer willing to pay a premium for what's perceived to be a premium name. With a lack of true differentiation, Sony, Panasonic, and Sharp are losing out to lower-cost manufacturers.

The call
After carefully reviewing the prospects for Sharp, I've decided to make a CAPScall of underperform on the company.

If you've taken the time to read Sharp's latest quarterly report, this call should come as no surprise. Although Sharp's auditors issued no red flags, Sharp itself uttered a "going concern" warning given the amount of cash it's burning, and also given that roughly $250 million in debt becomes due in September, which is currently doesn't have the cash to cover. Sharp has been actively shopping itself around for investment capital and partnerships to hopefully raise cash, but the prospects over the long term don't look promising.

The two keys to Sharp's success are a strong retail presence in brick-and-mortar stores with regard to televisions and a solid foundation with Apple whom it supplies LCDs to for the iPhone 5 and other mobile devices. The truth of the matter is that it's failing miserably at both.

One of those avenues for selling its television and electronic products is Best Buy which has struggled mightily itself by relying on television sales for too long. Best Buy's restructuring plan includes a greater focus on mobile products, and an emphasis on add-on high-margin services. Nowhere in its reorganization does it say the company will focus on TVs. In fact, Best Buy is doing whatever it can to distance itself from its reliance on TVs, which ultimately will hurt Sharp and other Japanese electronics manufacturers.

As for Apple, you have to be thinking, "How can Sharp screw this up?" Pretty easily if it doesn't have the proper quality control or manufacturing capabilities in place. As reported by The Wall Street Journal in September, prior to the iPhone 5 release, Sharp had difficulty meeting its portion of LCD screen shipments. Not surprisingly, Apple cut its LCD orders from Sharp by half in December according to Japanese newspaper Sankei Biz -- another blow for the already struggling company.

Is Sharp a "going concern" in my eyes? You bet your behind it is!

Is increasing competition a big concern for the Cupertino Colossus?
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of, and creating a bull call spread position in, Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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