Despite his James Bond-like attempts to reinvigorate shareholder enthusiasm in Sony's
I'll grant you that shares of the Japanese consumer-electronics giant have risen roughly 15% since the beginning of his tenure, but that hardly makes the stock a stellar performer, considering that the relatively stately NYSE Index has managed to advance some 23% over the same period -- while rivals such as Matsushita
Does this mean that investors should look to do a little bottom-fishing here? After all, shares of Sony currently trade at roughly 19 times forward earnings estimates, a 9% discount to the average multiple afforded the competitors I mentioned above, while arguably having a much broader range of assets. But in my Foolish opinion, the answer would still have to be "no." I believe that Sony still has a number of issues to resolve before I'd feel comfortable taking a position in this conglomerate versus investing in faster-growing, more tightly focused new competitors such as Apple
The first of these issues I'd like to address is simply that Sony is a huge conglomerate in wihch, despite management's best efforts, operating divisions still continue to be run as private fiefdoms. That makes it hard for the overall company to change directions quickly. I like to call this "The Titanic Effect."
The Titanic Effect
In the last fiscal year ended March 31, 2006, Sony recorded revenue of approximately $63 billion -- an impressive total by any means, but one that has essentially been flat since 2001. Though the company operates in five divisions -- Electronics (roughly 64% of total year-end revenue), Games (12%), Pictures (10%), Financial (10%), and Other (4%) -- the reality is that these "divisions" encompass a whopping total of more than 1,000 operating subsidiaries and affiliates. Correct me if I'm being foolish, but isn't this a textbook case of bureaucracy run amok?
I suppose the issue wouldn't be so pressing were Sony not now faced with eroding margins in its core Electronics division. In simple terms, Sony has fallen behind new technology entrants such as Apple (the iPod and accompanying iTunes music store come to mind) in terms of developing the next must-have product in the digital era, while it faces relentless pressure on the manufacturing end from low-cost Korean and Chinese producers in what is becoming an increasingly commoditized business.
Now, I know that many on the Street have been proclaiming the much-delayed arrival of PlayStation 3 as a tonic for Sony's ills, but I think that's a hard pill to swallow for one simple reason: eroding customer confidence in its products.
Eroding customer confidence
I don't know about you folks, but when I was a child, Sony's brand name was synonymous with quality, reliability, and affordability. In today's age, I'm not too sure that applies. Take the PS3, for example. After multiple delays, the PS3 was finally launched this past November. The 400,000 units available in the U.S. sold out within days, but only because the supply was limited. (Europe won't get the option to purchase the PS3 until after the holiday season.) To add insult to injury, the PS3 sells for between $499 and $599 a unit, a huge premium to Microsoft's
Nor have Sony's gaffes been limited to the PlayStation, as the recent worldwide recall of batteries the company supplied for notebook computers amply illustrates. The recall cost Sony a $441 million charge in the second quarter of this year and caused it to lower full-year net income guidance by some 35%. Throw in an ongoing Justice Department investigation into business practices at its SRAM computer-chip business, and various copyright suits in its music division, and it just doesn't add up to a company that seems to be fully in control of its own destiny at the present time.
Valuation
Even though Sony's shares trade at a relative discount to its competitors, I believe the company needs to address a few of these key issues that are undermining both its business results and its brand name. I would urge investors to tune out their interest in Sony until a later date.
Dell and Microsoft are Motley Fool Inside Value selections. You can check out the ultimate value investing service free for 30 days. Dell is also a Stock Advisor pick.
Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the New York Giants, or pondering the vagaries of life (pretty unsuccessfully up to this point). He welcomes your feedback. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.
