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Sony’s Turnaround in Question

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The hopes for Sony's (NYSE: SNE  ) turnaround were short-lasted indeed. After having posted its first quarterly profit in three years last year, the company once again returned to the red. Last year, the stock rose more than 50% on hopes of a successful turnaround, which now seems increasingly unlikely. Making matters worse, the Japanese electronics giant was recently downgraded by Moody's, in part due to stiff competition from companies like Samsung (NASDAQOTH: SSNLF  ) and Apple (NASDAQ: AAPL  ) . Can Sony really turn things around?

Stiff downgrade
Moody's downgraded Sony's debt rating to junk and did so in no uncertain terms. According to the ratings agency, while Sony has made significant steps toward revitalizing its ailing business segments, the company still faces a great deal of near-term issues. Especially the PC and TV businesses are in trouble, which according to Moody's has to deal with "intense global competition, rapid changes in technology, and product obsolescence."

By segment, the ratings agency sees the greatest downward earnings pressure for home entertainment and sound as well as mobile products and communications, while devices, imaging products and solutions, music, and pictures are expected to remain profitable. However, not profitable enough to maintain an investment-grade rating on the company.

Sony already holds a junk rating from Fitch, while it just about has an investment- grade rating at Standard & Poor's at the moment. The launch of the PlayStation 4 definitely helped boost the bottom line, with some commentators estimating the number sold at more than 6 million by now. Sony confirmed around 4.2 million units sold in late December. However, even this strong performance has not returned the company to its previous level of profitability.

Sony's main problem is that the products it relies on, such as televisions, cameras, and PCs, are rapidly being replaced by mobile devices such as smartphones and tablets, a product category in which the company is not particularly competitive. As such, many analysts doubt Sony's ability to survive in a consumer-electronics environment which is dominated by Apple and Samsung. Basically, devices made by these companies can do more or less everything a separate Sony product would be able to do.

Apple has probably become the world's best-known electronics company and is the largest stock by market cap traded in the US. Often compared to Sony 10 years ago, the company has revolutionized mobile communication with the iPhone and iPod. However, even Apple isn't invincible. For its latest report, the company said it had sold about 51 million iPhones, well short of the 55 million consensus estimate, as it continues to lose worldwide market share to Samsung and cheaper Asian competitors. Following the release, Apple's stock tanked in after-hours trading.

Samsung does not appear to be feeling the same pinch from cheaper competitors, probably because its products are also cheaper than Apple's. For its fourth-quarter report, the Korean company sold a record 86 million smartphones, achieving a market share of 29.6%, well above Apple's 17.6%. For full-year 2013, Samsung sold some 319.8 million phones, giving it a market share of around 32.2%. However, Chinese vendors are growing roughly twice as fast as the industry. Huawei now has a market share of around 5.7% and Lenovo is up to 4.7% already.

The bottom line
Sony is in trouble. If this was not yet clear from its last earnings report, it has certainly been underscored by a harsh downgrade from Moody's. Indeed, the company's core businesses of cameras, TVs, and PCs are under pressure, as mobile devices and smartphones in particular seem to be replacing these traditional product categories for many consumers. While the company's restructuring seems to be going in the right direction, much more will be needed to speak of an actual turnaround.

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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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