Sony Corp. Struggles Continue

We believe Sony Corporation (SNE - Analyst Report) will continue to struggle as it faces competition from innovative digital products and increasing competition from low-cost Asian manufacturers as the consumer market slows.

While its gaming division turned to profit during Q1 due to improvements in PS3 and PSP operations, overall results were disappointing. Sony posted weak first quarter results with flat revenues, and lowered its 2008 earnings outlook.

Sluggish consumer spending in some of its key markets and intense pricing pressure has hurt revenue while variable costs have risen. Moreover, with increased competition and lackluster demand, LCD projection television prices have come under pressure, prompting Sony to exit the business. Also, weak performance of its affiliates, such as Sony Ericsson led to a decline in its profitability.

In recent years, though Sony has been actively restructuring to improve profit in its core electronics division, the hefty startup costs for the PS3 and slow ramp are still weighing heavily on its revival efforts. Sony’s brand image has been hurt by several missteps, including the global recall of its batteries for notebook computers, payola charges in its music business, and most recently by charges from the European Union of price fixing in the market for professional videotapes.

Sony is currently trading at 17.4x our estimated fiscal 2008 EPADR. Although Sony maintains strong distribution channels and a brand name, we would avoid the stock until the company demonstrates sustainable improvements in results.

We therefore maintain a Sell recommendation on the stock with a six-month price target of $34.00. This reflects a P/E multiple of approximately 15.7x our estimated fiscal 2008 EPADR of $2.17, which we believe is a reasonable valuation for a company in Sony’s position.

Read the full analyst report on SNE

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