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Sony (SNE) Focuses on Organizational Overhaul, Risks Persist

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On Jan 3, we issued an updated research report on Sony Corporation (SNE - Free Report) .

The Japanese electronics giant’s Game & Network Services (G&NS) segment, which accounts for its service-related revenues, has lately proved to be one of the strongest growth drivers due to rise in game software sales. PlayStation — the company’s flagship gaming product — is acting as a solid growth catalyst for the past several quarters. Per the company’s mid-term business plan, console sales, subscriber addition to PlayStation network and virtual reality headset prospects are likely to boost revenues for the company.

Increase in media networks and television sales as well as insurance premium revenues are expected to stoke growth of the Pictures and Financial Services segments, respectively. Music sales are anticipated to be driven by strong visual media sales as well as recorded music sales. The company expects demand for image sensors for mobile products to grow, which in turn will drive Semiconductors sales. Concurrent with the fiscal second-quarter results, Sony revised its consolidated guidance for the fiscal year ending Mar 31, 2019. The company now expects sales and operating revenues to be ¥8,700 billion, up from ¥8,600 billion predicted in July. This is primarily due to higher-than-expected sales in the G&NS segment and Music segment. Income before income taxes is expected to be ¥975 billion, up from ¥760 billion, primarily due to likely increase in operating income as well as higher-than-expected net gain on equity securities in the current quarter. Net income is anticipated to be ¥705 billion, up from ¥500 billion backed by higher pre-tax income as well as lower-than-expected effective tax rates.

Sony has been making efforts to attain a leaner organizational structure to better focus on business growth. The company announced a number of changes in its internal administration and reshuffled operating segments. It believes that converting its business units into distinct subsidiaries will enhance its organizational independence as each independent unit set high targets in an effort to accomplish the company’s mid-term goals. Sony believes that this will enable it to generate sustainable profit, accelerate decision-making processes and reinforce business competitiveness.

Recently, the company announced that it is ramping up production level of its next-generation 3D camera sensors for 2019 in response to rising demand from several customers including Apple Inc. (AAPL - Free Report) . Other smartphone manufacturers are likely to leverage Sony’s camera chips to power both the front- and rear-facing 3D cameras of their models this year. Further, the company is working on providing separate software toolkits to outside developers, which will help in boosting in-store and online customer experience.

Moving ahead, Sony intends to concentrate mainly on the premium segment of the branded products market to enhance its growth potential. Robust improvement in the operating performance of the G&NS, Imaging Products & Solutions, Semiconductors, and Financial Services segments proved conducive to operating income in fiscal second-quarter 2018. The company also launched a few products, which will supplement sales in the long run. Within the Home Entertainment & Sound segment, Sony is focusing on high value-added models such as 4K TVs to improve the product mix. The company’s shares have gained 3.1% against the decline of 2.8% for the industry in the past year.



Risks

Escalating cost of operations has become a major cause of concern for Sony over the past few quarters. For instance, in the fiscal second quarter, the company’s total expenses increased 4.6% year over year, primarily on account of higher financial services expenses. For the first six months of fiscal 2018, the metric recorded an increase of 3.9% from the previous year.

In addition, Mobile Communications sales decreased 31.5% year over year in the fiscal second quarter due to decline in unit sales of smartphones primarily in Europe, Latin America and the Middle East. Intensifying competition in the smartphone domain is weighing on profitability.

Sony has a strong international presence, with majority of its revenues coming from emerging markets. The company has been suffering from negative impact of foreign currency movement. Fluctuations in foreign exchange rates, particularly yen, the U.S. dollar and euro, negatively impact Sony’s financials as it has significant exposure in these currencies, both in terms of sales and production costs.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock.

Stocks to Consider

A few better-ranked stocks in the broader industry worth considering are Hudson Ltd. (HUD - Free Report) and Manchester United plc (MANU - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.          

Hudson has a long-term earnings growth expectation of 29.4%.

Manchester United plc has a long-term earnings growth expectation of 21.4%.

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