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Sony (SNE) Rides High on Thriving End Markets, Restructuring

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Earlier this month, Japan-based multinational conglomerate, Sony Corporation (SNE - Free Report) , came up with stellar first-quarter fiscal 2017 results which came ahead of our expectations. The after-effects of the devastating Kumamoto earthquakes, which had washed out a chunk of the company’s profits for fiscal 2016, have subsided to a large extent.

Meanwhile, Sony has been firing on all cylinders to boost profitability and the results are slowly beginning to manifest themselves in better operating income and margin performance. Buoyed by positive industry trends and lower currency volatility, the company has also raised its fiscal 2017 guidance.

The stock’s movement in recent times mirrors these positive developments. Year to date, Sony’s shares have gained an impressive 44.7%, outperforming the industry’s average gain of 40.2%. Further, analysts have become increasingly bullish on the company over the past month, as the Zacks Consensus Estimate for fiscal 2017 earnings trended up over 9% over the same time frame. Sony reported earnings of $2.35 from $2.15 on the back of two upward estimate revision versus none lower.

Read on to find out the key factors which make this Zacks Rank #1 (Strong Buy) company an attractive proposition for investors right now.

Playing for Money: Gaming to Drive Growth

The PlayStation4 console, which is arguably Sony’s biggest growth driver, is going strong even after three years of release, evident from the company’s latest released numbers. The consumer electronics giant announced that it has sold over 60.4 million units of the console till June 13, 2017. PS4 Pro, the upgraded version of PS4 gaming console and virtual reality (VR) systems are raking in huge profits.

Also, Sony’s recent efforts to offer an array of game applications for mobile products through ForwardWorks Corporation, is well on track.  Subsequent to the end of the first-quarter fiscal 2017, ForwardWorks started to distribute its first game, Everybody's Golf. It has been downloaded more than 2 million times. Sony has plans to distribute its first original content, called Sora, to Umi no Aida from the beginning of October.

Spectacular Rebound of Semiconductor

Sony’s Semiconductor segment was one of the worst hit businesses, thanks to the Kumamoto earthquakes. However, the company’s concerted efforts to turn its fortunes around are taking hold. Over the past two quarters, semiconductor segment almost single-handedly drove the operating income growth.

During the first-quarter of fiscal 2017, Semiconductors sales and operating revenues jumped 41.4% year over year to ¥204.3 billion ($1.8 billion). The improvement came on the back of strong sales of image sensors for mobile products and absence of the impacts of Kumamoto earthquakes. Going forward, Sony has plans to increase its image sensor production capacity from the current 88,000 wafers per month to approximately 100,000 wafers by the end of March of 2018.

Fiscal 2017 Outlook Raised

Concurrent with the fiscal first-quarter results, Sony revised the revenue guidance for fiscal 2017. Currently, the company expects total sales to be around ¥8,300 billion, up 3.8% from the earlier figure of ¥8,000 billion. The upward revision is largely attributable to lesser-than-expected impact of foreign exchange rates.

The company reiterated its operating income guidance and continues to expect it to be around ¥500 billion, a jump of 73.2% from fiscal 2016. Improvements in operating income are expected to be driven by recovery of Semiconductors and Pictures segments.

Diligent Restructuring Efforts Raise Hope

Sony has also undertaken a number of measures in its Branded Product Business, which include Mobile Communications, Imaging Product & Solutions and Home Entertainment & Sound segments, to ensure stronger growth. A number of measures, including cost-reduction initiatives, lower exposure in low-profit geographic regions and reduction in advertising & promotion expenses are expected to benefit this business in the long run.

Over the past two years, Sony has been working hard to attain a leaner organizational structure to augment growth. The company announced a number of changes in its internal administration and reshuffled its operating segments.  Sony believes that converting its business units into distinct subsidiaries will enhance its organizational independence as each unit will set high targets to meet the company’s mid-term targets.

Impressive Valuation

Sony also has a Zacks VGM score of ‘A’. The VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. A good VGM score indicates stronger chances of success. Our research shows that stocks with Style Scores of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 or 2 (Buy), offer the best upside potential.

Other Stocks to Consider

Some other top-ranked stockws in the same space include Central Garden & Pet Company (CENT - Free Report) , H&R Block, Inc. (HRB - Free Report) and Nintendo Co., Ltd. (NTDOY - Free Report) . While Central Garden and H&R Block sport a Zacks Rank #1, Nintendo carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Central Garden & Pet Company has a solid average earnings surprise of 122.5%, beating estimates each time over the trailing four quarters.

With three beats in the trailing four quarters, H&R Block has a positive average surprise of 9.0%.

Nintendo has a positive earnings surprise of 190.0%, with three consecutive beats over the trailing four quarters.

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