SNE - Sony Corporation (ADR)

[bmichaud]

I'd love to hear the various tech gurus' thoughts on SNE - specifically valueinv and brkerguy.

 

With a hideous record of missing guidance, a forecasted ~$1B loss and now activist pressure pushing for a restructuring, there seems to be sufficient pressure on management to finally get something done. SNE roughly doubled in price to over $22 through the first half of 2013, likely on a combination of Loeb involvement and the Nikkei/TOPIX rally, but now is back around $17. I am just starting to look at it, but preliminarily it looks potentially quite interesting.

 

Broadly, you can break the Company down into three parts - Electronics, Entertainment and Finance. Though due to the heavy losses in the Home Entertainment & Sound division, I prefer to split that out from the overall Electronics division and rename the remaining electronics divisions "Technology", as the various divisions put together resemble a tech conglomerate; and due to the uniqueness of the Pictures & Music divisions, I prefer to break those up as well. So looking at Sony in five parts looks as follows: 

 

1) Technology - imaging, game, mobile and devices

2) Home Entertainment

3) Pictures

4) Music

5) Finance

 

Fiscal Year 2010/2011/2012 Sales (Billions, Yen):

 

Technology                  3,564  3,216  3,544

Home Entertainment    1,713  1,283  995

Pictures                          600, 658  733

Music                              471  443  442

 

FY 2010/2011/2012 EBITDA:

 

Technology                      307  206  132

Home Entertainment        -44  -176  -61

Pictures                              47  45  58

Music                                  51  48  49

 

 

Sony Pictures:

 

The opportunity for value-enhancement lies within the Pictures division. In 2012, Sony Pictures EBIT margin was 6.5% versus 15.3% for 21st Century Fox (FOX). Given the similarities between the two, this discrepancy appears outrageously wide....

 

At its 2012 earnings power, a 90 USD/Y exchange rate and FOX's EV/EBIT multiple of 15.8X, Sony Pictures is worth $7.17 per share. Given the lower-than-average margin profile however, using FOX's multiple is likely far too generous. At 8X, Pictures is worth $3.63.

 

Were Sony to spin out Pictures and bring EBIT margins up to FOX's 15% level, Pictures would be worth $16.53 at FOX's multiple.

 

The Yen strength from 2001 to 2012 obfuscates the underlying growth in Sony Pictures, which derives the majority of its revenue outside of Japan. In very rough terms, Pictures grew sales in USD terms from $5.2B in 2001 to $9.17B in 2012, a ~5.2% CAGR. For comparison, FOX grew at 4.6% p.a. from $7.3B to $12B.

 

Sum of the Parts:

 

90 USD/Y exchange rate used for all - since I am predominately using 2012 numbers, which were at an average exchange rate of ~80, 90 is a decent in-between figure since today's ER is ~105. Sony derives just over 30% of revenue from Japan....

 

Non-Core Assets

 

Technology - Using 2012 sales of 3.5T Yen, assuming a "normal" EBITDA of 5% and an EBITDA multiple of 5X, I get to $8.41 per share (1.17B shares out)

Home Entertainment - Assuming 2013 sales fall 20%, and the division is worth a Nokia-like .3X sales, FVPS is $2.27

Financial - Sony's 60% stake is worth ~$3.46 per share at current levels and assuming a 105 exchange rate

Net Debt - $2.98 per share

 

Non-Core FVPS: $11.15

 

Core Assets

 

Music - Softbank's rumored bid for Universal last year was at approximately 7.5X EBITDA. Using this multiple on Sony Music's 2012 EBITDA, Music is worth $3.46 per share

Pictures - At 2012 earning power and an 8X EBIT multiple, Pictures is worth $3.63 per share.

 

As-Is FVPS: $18.25

 

Assuming Pictures is spun out and brought up to FOX levels, Sony is worth $31 per share.

 

 

 

This is an extremely crude treatment of Sony, but I just wanted to get the conversation rolling if anyone else is interested. Some questions I have:

 

1. Why is Sony Pictures so severely under-earning FOX? Is it just extreme bloat? Different accounting? Something structural?

2. Sony Technology appears to be lost at sea, with different divisions and extremely low EBITDA margins. What is the future for this segment, and is a "normalized" EBITDA margin of 5% appropriate?

3. Is Home Entertainment & Sound worth anything in sale? Anything above $0 is dubious at best given its on-going losses.

[phil_Buffett]

I have a stake in sony. Last year i bought it and are now in the red

I like that loeb and gabelli have a stake in it.

The movie business is the best. They could a big increase in share price

If sony will restructure the unit a little bit, as loeb mentioned.

A spin off would be nice but they dont do it.

The corporate world is in japan very bad so a lot of thinks that would be good for stock price we will not see.

 

They sold recently their pc business which is very good that they did it. Now they have also to quit there tv business. This would be very good.

 

In the end i think the sum of the part value of sony is a lot higher than today share price

[phil_Buffett]

Also i like the ps4. It outsells the xbox clearly

[yadayada]

ps4 also uses cheaper hardware right? Because the tech is more matured now.  Read that they are breaking even from the start on that one with the hardware. And the gaming market seems to be getting bigger every year.

[muscleman]

are their subsidiary's debt recourse or non-recourse to the parent? that could make a huge difference.

[bargainman]

As an anecdote, their camera tech is awesome.  They are being innovative and almost disruptive.  First ILC Full frame camera for about 2K, sensors in iPHones, Waterproof Experia Z1.  Impressive stuff.