It’s a Sony!

03/13/2008 12:00 am EST

Focus: STOCKS

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says the Japanese electronic giant has strong businesses and its recent victory in the HD format wars is icing on the cake.

One of the largest consumer electronics companies in the world, Sony (NYSE: SNE) generates almost $80 billion in annual revenues. Europe, the US, and Japan each produce about a quarter of the company’s revenues; the remaining quarter comes from the rest of the world.

The electronics segment generated two-thirds of sales for the first nine months of fiscal 2007. It makes liquid crystal display (LCD) televisions; personal computers, printers and monitors; camcorders; digital cameras; DVD players and recorders; Blu-ray (high-definition) disc players and recorders; broadcast and professional audio-video Equipment; audio systems; semiconductors; and mobile handsets.

The game segment, which generated 14% of sales, includes PlayStations 2 and 3 and PlayStation Portable consoles and software. It also collects royalties from third-party software developers.

The Sony Pictures segment produced 9% of sales. It engages in the production, acquisition, and distribution of movies and television programs. It also creates and distributes digital content and operates the Sony Pictures Studios. Production companies include Columbia Pictures, TriStar Pictures, Screen Gems, and Sony Pictures Classics.

The financial services segment, accounting for 7% of sales, operates as Sony Financial Holdings (SFH). It includes Sony Life Insurance, Sony Assurance, and Sony Bank. SNE sold a 34.5% stake of SFH through an initial public offering last October. Other businesses accounted for the remaining 3% of sales. SNE’s equity investments accounted for 26% of net income during the first nine months of fiscal 2007.

Although SNE is well regarded for its premium electronics and blockbuster movies such as “Spider-Man,” it has suffered from malfunctioning laptop batteries and a less-than-stellar launch of PlayStation 3. Fiscal third-quarter net revenues grew 9.6% year-over-year, electronics sales grew 14%, games jumped 31.2%, pictures fell 24.6%, financial services dropped 21.4%, and other sales climbed 2.1%.

The operating profit margin declined 24 basis points to 6.63% due to declining television prices, losses in Sony Life Insurance assets, and poorly performing movies. Net income jumped 25.2% year-over-year to ¥200.2 billion, or ¥190.29 per share. At ¥102 per US dollar, this translates [nearly $2 billion] or $1.87 per share.

Despite better-than-expected operating results in the quarter, management cut full fiscal- year operating profit margin guidance by 40 basis points to 4.6% due to changing currency rates and the deteriorating value of Sony Life Insurance’s investment portfolio. [But it raised] guidance for net income by ¥10 billion to ¥340 billion ($3.3 billion) due to greater amounts of nonoperating income.

Rival Toshiba recently withdrew its HD-DVD format from the market, which ensures victory for Sony’s high-definition Blu-ray DVD format. This should prompt consumers to get off the fence and buy Blu-ray players and DVDs. It could also result in better-than-expected sales for PlayStation 3, which has a Blu-ray player installed.

(The ADRs closed below $44 Wednesday, near their 52-week low—Editor.)

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