August 1, 2017

Breakingviews: Sony is Turning from Financial Wimp Into Superhero

by Breakingviews.

Sony is turning from financial wimp to superhero. Results on Tuesday offered fresh proof of the Japanese stalwart’s turnaround under Chief Executive Kazuo Hirai and finance chief Kenichiro Yoshida. Shame it remains a bit of a corporate mutant.

A first-quarter operating profit of nearly 158 billion yen ($1.4 billion) suggests Sony is on course to beat its full-year target of 500 billion yen, and perhaps beat 1998’s record of 526 billion yen. This is down to hard work, plus a little luck.

This year’s biggest operating profit contributor will be gaming, thanks to the PlayStation 4, and a shift to buying games online is further good news. Making image sensors will be almost as lucrative this year, as smartphone cameras keep improving. Streaming has revived the music industry. And Sony has sensibly pruned in consumer electronics, focusing on pricier televisions and mobile phones.

Even the long-suffering Sony Pictures, recently the source of a $1 billion writedown, should swing to profitability this year. It has a new boss and is making valuable content for online streaming such as Netflix’s “Better Call Saul”. Goldman Sachs analysts suggest the new “Spider-Man: Homecoming”, made with Disney, could be the start of the blockbuster movie franchise Sony needs.

The revamp has already generated out-of-the-ordinary results for shareholders. Anyone buying Sony stock five years ago would have made more than five times their money, including reinvested dividends, Datastream shows. That is more than double the total returns for Japan’s Topix index. And this streak could continue – analysts were last this positive in 1998, suggesting further upside.

If there is one big drawback, it is that Sony still sprawls. It is a funny hybrid of hardware and content, with eight major divisions. It is not clear why it fights on in the only narrowly profitable business of handset-making, for example, where it will never catch Apple or Samsung. It also has lots of capital tied up in cross-shareholdings, most notably Sony Financial, M3 Inc and Olympus, as Seth Fischer of Hong Kong’s Oasis Capital noted at a recent conference. For now, though, this mutant is delighting audiences.


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