Sony (NYSE:SNE) is in the midst of a comeback effort that could change the company's identity. Its comeback strategy has faltered and shifted in key ways, but the stock has been on an absolute tear the last six months, with its share price increasing just under 45% in that span. 2015 alone has seen the stock increase more than 35.6%, which puts the company's price at a three-year high. Meanwhile, the S&P 500 has gained just 2.02% so far in 2015.
Yet, even with Sony's impressive gains, shares are still down roughly 20% from five years ago. In order to better understand Sony's trajectory, let's take a look at some of the factors that have propelled its recent turnaround.
Tailwinds in the Japanese economy
In the October-December quarter, the Japanese economy grew 2.2%. The gain was a fair bit lower than the average estimate of 3.7% growth anticipated in a Reuters poll, but the emergence from the recession spurred on by an April 2014 consumption tax was still a welcome sign.
While the broader future of the Japanese economy remains somewhat shaky, the country has seen some notable progress, and Sony and its stock appear to be benefiting from "Abenomics." The Bank of Japan and the country's Government Pension Investment Fund are increasing investment of public funds in large cap stocks, and it's had a visible impact on local markets.
The Tokyo Price Index has gained roughly 30% in the last year and roughly 8.5% year to date, and the Nikkei 225 has climbed to 15-year highs. Large Japanese companies like Sony and Toyota are also benefiting from the weak yen that has resulted from the Bank of Japan's quantitative easing measures.
Sony delivered a winner of a quarterly report
Sony reported results for its third quarter ended Dec. 31, 2014 in early February, and the earnings release prompted shares to jump nearly 15%. The average analyst estimate called for $20.1 billion in revenue and $1.13 billion in operating profit, but actual results for the period came in well ahead of expectations with revenue of $21.8 billion and $1.52 billion in operating profit.
Outperformance from the company's image sensors and PlayStation businesses helped propel the beat, while its financial services segment performed well, as per usual, and accounted for the biggest share of quarterly operating income. Mobile performance for the quarter was once again disappointing, but the segment was still profitable thanks to favorable yen exchange rates.
The strong third quarter results for Sony followed up another strong performance in the previous quarter, and prompted the company to lower its anticipated yearly losses from 230 million yen to 170 million yen.
Sony looks to be trimming fat and swapping out the weakest of its "pillars"
In 2012, CEO Kazuo Hirai touted a "One Sony" strategy that would see its segments integrate more efficiently and place special emphasis on the three pillars of mobile, gaming, and digital imaging. The company hasn't made much progress on the mobile front, with its phones lagging far behind competitors like Apple and Samsung in terms of sales and brand strength. Now, Sony is de-emphasizing mobile and views its movie, music, gaming, and imaging businesses as the key components to future success.
This recently announced shift was accompanied by the news that Sony would spin-off its camera and music player businesses into a wholly owned subsidiary, and that the company was considering the sale of its television and mobile phone businesses. 2014 already saw the company spin-off its television business, sell its PC division, and announce the lay-off of some 5,000 employees.
As Sony focuses on growing its image sensor, gaming, and entertainment businesses, it expects that it will be able to increase its operating profit from 20 billion yen for the fiscal year wrapped March 31 of this year to 500 billion yen in 2018. The company's PlayStation 4 gaming system has great momentum, and has shipped roughly 20 million units, whereas its competitor Microsoft has shipped roughly 12 million Xbox Ones. Profitability for the company's gaming division should increase as costs come down and the installed base grows.
On the film side, a recent deal with Disney to bring Spider-Man to the Marvel Cinematic Universe may better enable Sony to strengthen its own Spider-Man franchise, since Sony and Marvel are considering bringing other Marvel Cinematic Universe characters to future Spider-Man films.
The company's image sensor business has the potential to grow as it continues to supply technology for phones and tablets from company's like Apple and Samsung.
With these elements working in its favor, Sony should be able to increase earnings, but problem divisions like mobile and televisions may continue to limit gains.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple and Walt Disney. The Motley Fool owns shares of Apple and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.