Sony: A Japanese Turnaround ...

02/10/2006 12:00 am EST

Focus:

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy recently launched a great new service, focused on global investingThe Global Bull Market Alert. Here, he looks at Sony, which he believes is benefiting from a turnaround within its own corporate operations, and a recovery in its home market, Japan.

"Last year, BusinessWeek magazine looked at Sony (SNE NYSE) and compared CEO Sir Howard Stringer's task in turning around the ailing Japanese consumer electronics giant to ‘raising the Titanic.’ After taking the reins last March, few outsiders gave him much chance of quickly reversing Sony's fortunes and bringing Sony's brand into the digital-age. One year later, Stringer hasn't quite raised the Titanic completely out of the water, but he's certainly got a good grip on it.

"The first signs? Sony recently revised its earnings estimates, projecting a $605 million profit for its full fiscal year through March, reversing a previous estimate of an $86 million loss. That's an astonishing turnaround. Stringer's restructuring plan is nothing if not serious. He's pledged to cut 10,000 jobs, or 6.6% of Sony's workforce, by March 2008. He's also committed to cutting 200 billion yen of costs ($1.7 billion) as part of a three-year restructuring plan. This means closing 11 factories and reducing the number of new electronics products by 20%. Even Sony's iconic robotic dog has been put to sleep.

"Despite the knocks it has taken in the press over the past 18 months, Sony has a terrific product pipeline. Remember all the hoopla concerning Microsoft's Xbox? It came as a big surprise that both Sony's PlayStation 2 and its PlayStation Portable (PSP) game machines outsold Microsoft's new Xbox 360 game console over the holiday season. That, despite the fact that the PS2 was launched back in 2000, while the newly minted Xbox 360 was just released last November. The prospects for Sony's shiny new PlayStation 3 to be released shortly look even better.

"Another success? Just four months after the introduction of the new Bravia liquid-crystal-display TV, Sony has the third-best selling LCD brand in the world. Finally, Sony's joint venture with Swedish cell phone giant Ericsson just announced a tripling of its profits. Suddenly, it seems, Sony is firing on all cylinders. With its many diverse businesses, Sony has its fingers in a lot of electronic pies. With the media focus on Apple and the ipod's success, it's easy to forget how big a company Sony really is. Sony is three times Apple's size in terms of revenues, yet its market cap is barely 60% of Apple's.

"An additional tailwind: Sony is a major blue chip in a recovering Japanese stock market. Its recent stock price performance has matched that of Asian rival Samsung. Yet few investors seem to have noticed. A recent pullback in Sony's stock price represents a solid entry point. So buy at market today. Place your stop at $40.60. If you want to play Sony's recovery for even bigger profits, buy the July $55 Calls."

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