Executives Summary
Sony is a world’s leading manufacturer, designer, developer and distributer of variety of electronic devices, music, pictures and films. After detailed analysis of financial statements and available market information about Sony we would recommend to buy Sony Corporation’s stock and hold for the long term. The recommendation is based on their dividend policy, trend of stock price, and current financial performance of Sony.
As of May 11 2010, 7:38 pm Sony’s Stock are traded approximately at $33.57 in New York Stock Exchange at the same time, in Tokyo Stock Exchange Sony’s stock are traded at ¥3031; while Sony’s stock price has traded between a range of $23.60 to $40.45 during one year period. Sony has been getting positive surprise in all quarter of 2010 exceeding the analyst estimation. According to Market watch in May 11, 2010, Sony has a Price/Earnings ratio of 9.56 that is far better compared to 2009 negative P/E ratio.
One of the basic things that investors evaluate before investing their money is company’s dividend payout as it shows the strong financial position of the company. Sony has been paying dividends since many years and they continue dividends even in the year when they had a loss. This indicates that financial well-being of the company and dividend payments enhance shareholders’ financial position and enable them to meet their required rate of return.
Sony has distinctive competencies on their operations that enable them to generate strong cash flow from their operation. Though Sony had a loss in 2009 they were able to generate positive cash flow from operation of ¥40.72 billion. Sony investing as well as financing activities was justifiable over the past three. Sony invests their money mostly on marketable securities, for financing, Sony has shifted their strategy from long term debt to short term debt. If Sony decided to stick completely on short term financing then it may create them problem at the time when they need huge sum of money. The reason is that Sony may not be able to borrow enough money within the short period of time. Another reason is that they have to return short term borrowing within a year.
Analyzing all above forces we can conclude that Sony is relatively low risk company to invest but Sony’s stock are positively correlated with economy. Since Sony sell products such as, computers, camera, game, and other electronic equipments, in the economic recession people try to avoid those products. Based on the assumption economy will continually go up Sony will be able to perform better. Therefore in the long run Sony will be able to delivery higher dividends. Furthermore, management’s ability to generate remarkable cash flow and pay higher dividend even in the year of worse financial performance in the history of Sony certainly adds value to the shareholders. Therefore we recommend Sony’s stock to buy and hold for the long term.
Introduction
Mission Statement
“Our mission is to become a leading global provider of networked consumer electronics, entertainment and services.”
Company background
Sony is the world’s leading manufacturer, designer, developer as well as the seller of audio, video, communications, and information technology for consumers and industrial market. Sony’s music, motion picture, television, computer entertainment, and online business makes it most widespread entertainment companies in the world having distinctive positioned with outstanding portfolio. Sony design and manufacture electronics devices and equipments, home-use game console and software, and it also involves into marketing, distribution and broadcasting of image-based software such as film, video and television products (Sony Europe, 2010). Sony has subsidiary all over the world with the name; Sony Japan, Sony United States, Sony Europe, Sony Asia and other international market. Out of 100% of total sales revenue, Sony Japan comprise of 24.2% of sales revenue, Sony USA comprise of 23.6% of total sales revenue, Sony Europe comprise 25.7% of total sales revenue and other Asian, middle East, and African country comprise of 26.5% of total sales revenue. Sony has divided its products into different segments as followings:
· Electronics: The electronic business comprises audio, video, televisions, information and communications, semiconductors, and other products. Electronic segments represent 65.1 % of total sales revenue of Sony Corporation. Within the Electronic segment audio comprise of 9% of Electronic segment sales, video comprise of 21%, television comprise of 25% of Electronic segment sales, information and communication comprise of 19%, semiconductors comprise of 4%, and other electronic equipments and devices comprises of 9% of total revenue of Electronic segment.
· Game: Sony’s game business consists of game consoles and software offered by Sony Computer Entertainment Inc (SEC). Game segment represents 12.7% of total revenue of Sony Corporation. As of June 2009, Sony has more than 24 million registered accounts for internet users of online game and game demos in more than 55 countries.
· Pictures: The Pictures segment consists of motion pictures and television programming (home entertainment) distributed by Sony Pictures Entertainment (SPE). Picture segment represents 9.3% of total revenue of Sony Corporation. The motion picture categories of Sony’s product consist of 13.00% of total market share of North America’s Theatrical Box office. Home entertainment of Sony’s product achieved the second highest market share of US DVD market.
· Financial services: Sony’s Financial Service segment consists of Sony Financial Holding Inc. (SFH) and its consolidated subsidiaries, Sony Life Insurance Company, Sony Assurance Incorporation, and Sony Bank Incorporation, and Sony Finance International Incorporation. Financial service segment represents 6.8% of total revenue of Sony Corporation.
· Others: Others segments consists of music recording business named Sony Music Entertainment Incorporation (SME), Sony Music Entertainment Japan Incorporation and Sony network service-related business of So-net Entertainment Corporation (So-net). Other segment represents 6.1% of total sales revenue of Sony Corporation. Sony music entertainment consists of great artistry yielded hits from well established stars including AC/DC, Beyonce, Pink and Britney Spears and others which occupy 25.7% of US market share of music business. Sony Music Entertainment Japan is also Sony’s successful product line which comprise of 13.8% of total market share of Japanese music business. As of March 31, 2009 Sony also own and administers more than 750,000 music copyrights. Sony sales and distributes those music via So-net Entertainment Corporation (Sony, 2009).
Industry Overview
Sony Corporation is well diversified company that offers wide variety of products from different industries. For the Sony it is hard to analyze and explain the industry overview only from one industry because Sony competes with its competitors with the product lines from more than one industry. Basically the industry where Sony Corporation competes is: Consumer electronic, Banking, Computer hardware, Computer peripherals, Computer display and projectors, and Printing and imaging equipment.
In consumer electronic equipment industry Sony is the leader with $34.34 billion of market share. In term of revenue generation, Consumer electronic is one of the major products that Sony offers that consists of more than 65% of sales revenue.
Competitive Analysis
As Sony Corporation engages in designing and manufacturing of electronic equipments, games, pictures and the distributing of many other financial services in the United States, Japan, Europe, Asia and other international market; undoubtedly, there are some highly competitive companies which are also manufacturing and distributing of electronic equipments, games and pictures. Since the Sony diversified its products from more than one industry, its competitors are also differs from one business segment to another. For the Electronic Equipment Business segment, Panasonic Corporation, Philips Electors, and Sanyo Electric Ltd are the major competitors. Similarly, for the Game Business segment, Microsoft and Nintendo are the major competitors and for the Music segment Warner Bros and Universal are the major competitors. In order to increase market share, gain brand recognition and maximize shareholders’ benefits, these companies have combated with each other and also attract their own loyal consumers. Sony competes with its competitors by its quality, variety, and price; therefore, it positions to be a remarkable brand and company. The Sony’s distinctive competencies is ability to miniaturize most of its technological products such as television, radio, cameras, VCR and soon.
Financial Analysis
Sony’s revenue decreased from ¥820.19 billion in 2008 to ¥711.01 billion in 2009 which was about double the decrease it experience in 2008 (6.93% sales growth in 2008 compared to 12.86% decline in 2009). The most important factors that cause the decline were slowdown of the global economy, appreciation of the Yen against US dollars and Euro and decline of the Japanese stock market. Stronger Yen against US dollar makes Sony’s products expensive and force Sony to lower their profit margin to keep their price competitive. Segment wise, Electronics segments which represent 65% of total revenue were declined by 17% the reasons was the significant decrease on sales of products such as Handycam, video cameras, Cyber-shot, personal computers; Game segments which represent 12% of total revenue were declined by 18% the reason was that game cost very high and consumer does not want to spend more than $300 for their game.; Pictures segments which represents 9.3% of total revenue were declined by 16.4% year on year to; Financial Service segment which represent 6.8% of total revenue were declined by 7.4%. Further other operating revenue got huge loss such as film, video, recorded music, and network service business and advertising agency business in Japan (Q.57).
Cost of sales encompasses cost relate to the producing and manufacturing of products that include items such as material cost, and subcontractor cost. Sony’s cost of revenue had decreased over the years by 10% where as sales were declined by 12.86% compared to the previous year. This shows that company has not able to manage their expenses efficiently as the sales go down which is the bad signal for the Sony Corporation. However, Company’s shipping and handling cost went down by 11.96%, similarly advertising cost and research and development cost went down by 6.88% and 4.47% respectively in 2009. Sony’s cost of sales is fluctuating over the last three years from 77.83%, 76.69%, and 79.61% respectively from 2007 to 2009. The reason for the increased cost of sales could be the Sony’s strategies of unrelated diversifications. They have numerous business segments and all are different from one another and need different raw materials, finished inventories and processed (Q58 &59).
Sony has been restructuring its Electronic segment, Picture segment, and Music segment since 2007, the recorded cost of restructuring in 2009 was ¥75,390 million. Under the Electronic segment, two significant restructuring activities were retirement programs and termination of LCD rear-projection television operations in Europe. The restructuring charge of Picture segment was ¥6,946 million which consist of the reduction in staffing levels and personnel related cost. Sony has make efforts to the restructuring activities in the Music Business segment because of contraction of the physical music market. The restructuring charges were recorded ¥65,274 million by Sony Music Entertainment Inc. (SME), Sony Music Entertainment (Japan) Inc. (SMEJ) and Sony U.S. based music publishing subsidiary. Some of the restructuring program has terminated during the year 2009 and some will go further for the next year also. The cost of restructuring are recorded on selling and general expenses. Though Sony tried to reduce its Selling, General and Administration (SGA) cost by laying off the employees, reducing advertising and other cost, the restructuring cost made the SGA cost to be remain almost flat compared to 2008 (Q63). High restructure cost recorded resulted in a loss for the company for the year 2009. Therefore, instead of recording large restructuring cost in the year when company has net loss Sony could have accrued the restructuring charges and record that next year (Q64).
Sony was unable to generate as much interest income as they were able to in the previous year. The reason was that due to the downturn on stock market Sony’s dividend income from subsidiaries and equity investees went down by 97.7% compared to last year.
Sony’s other expense which consists of interest expenses; loss on devaluations of securities investment and others was decreased in 2009 by 20% compared to 2008. The main reason was that Sony had a loss on devaluation of securities investment, however, interest expenses was little higher than 2008. It was because Sony had huge payments of long-term debt and Sony had to pay final year interest with principle.
Sony had a negative net income of ¥98,938 million during the fiscal year ended 2009. The reasons for the negative net income compared to positive ¥369,435 million of 2008 was decreased in revenue, payment of deferred tax, loss on subsidiaries companies, high financial service expenses, restructuring charges and lower income from the investment (Q62). Out of total net loss 3.31% of net loss was from minority interest in loss of consolidated subsidiaries in 2009.
Assets
Sony’s financial performance showed that for the year ended March 31, 2009, it had a current ratio of 0.95 times meaning that for every dollar of Sony’s current liabilities it would only pay $0.95 with its current assets. This is not a good liquidity position and shows that Sony cannot cover its current liabilities with current assets dollar for dollar. This is a decrease from 2008 when it had a current ratio of 1.25. This may have resulted from huge decrease cash and cash equivalents by 39%, and decrease in call loan in the banking business by 86% in 2009. Sony’s cash and cash equivalents as percentage of total current assets in 2009 was 18.25%.
This percentage tells the poor liquidity position of the Sony. This portion of cash may have been invested in construction in progress which increased by almost 100% from 2008 to 2009 and intangible assets which increased from ¥263,490 million in 2008 to ¥396,348 million in 2009 as a result of intangible assets acquired during the year which included patents, and license agreements, software to be sold or leased, music catalogs, artist contracts and other intangible assets adding up to ¥201,366 million. Sony also paid an amount of ¥264,467 million in 2009 and gave huge amount of advances in the financial service business of ¥2,496,783 million in the same year which is far less than the proceeds they received. This strategy is somehow risky because it seems like they do not have enough cash for their day to day operations (Q1, Q2, Q8, &Q32).
Notes and accounts receivable decreased by 18.57% in 2009, from ¥118.36 billion to ¥96.38 billion in 2009, while the allowance for doubtful accounts and returns increased from ¥93,335 to ¥110,383 in 2009. In percentage the doubtful debt and returns increased by 18.56%, this could be an indicator that most of the company’s receivables are bad and uncorrectable and company has liberal credit policy. Concern here would be, while Sony’s sales was decreased by 12%, its receivable was decreased by 18% and the same percentage of sales were doubtful then how well company will be able to finance its operations, pay its liabilities and purchase inventory. Since Sony’s allowance for doubtful debts is based on potential uncollectible debts that are past due from customers with collectability issues, this shows that they are also not aggressive in collecting (Q3, Q7, Q16,Q18 & Q36).
Sony’s trend of inventories increased from 2006 to 2007 by 16%, from 2007 to 2008 by 28% and decreased from 2008 to 2009 by 20.41% which was from ¥102.16 billion to ¥81.31 billion in 2009 that may be explained by a decrease in sales and the overall performance of the company (Q15). All the same, the inventory turnover ratio for 2009 was 6.2 times which was in fact above the industry average of 5.4 times. Inventory turnover of Sony has had a downward trend from 7.8 times in 2004, 7.7 times in 2005, 7.2 times in 2006, 6.8 times in 2007, 6.9 times in 2008 and 6.2 times in 2009. Though high inventory levels are unhealthy because they represent an investment with a rate of return of zero, this should be well managed to avoid having it go all the way to below industry average. Low turnover may also imply poor sales and, therefore, excess inventory which could affect profitability if the prices fall. In general current assets in all of the company’s significant affiliates which are Sony Ericsson, S-LCD, Sony BMG and others also decreased compared to the previous year as shown in notes to financial statement (Q4 & Q5). For Sony inventory is slightly affected by high volume of sales during the holiday and Christmas season. The company funds their seasonal merchandise requirements with cash from operations and short-term borrowing (Q14).
Inventories in the Electronics and Game segments as well as non-film inventories for the Pictures segment are valued at cost, not in excess of market, cost being determined on the average cost basis except for the cost of finished products carried by certain subsidiary companies in the Electronics segment which is determined on the “first-in, first-out” basis. The market value of inventory is determined as the net realizable value. The application of different inventory valuation impairs the judgment on an analyst and these may end up misleading the investor. The company’s management may also use it as a lee way to use the valuation method that best suits their intentions. Further, the concern here as an analyst would be, is that the good decisions to record inventory in cost basis. During the period of constant price raise of inventories this will undervalue the balance sheet as well as income statement because price is recorded based on cost not as market value (Q11 &Q12).
The major players in Sony’s liquidity are cash and cash equivalents which has been fluctuating since 2007 from ¥678,998 million to ¥1,086,431 million in 2008 to ¥660,789 million in 2009, notes and accounts receivable and their allowance, that dropped significantly from 2008 to 2009 by almost 20%, inventories which have fluctuated over the years as indicated above, deferred taxes and prepaid expenses which should be reduced as much as possible to help clear accrued liabilities. On liabilities side, the main players are short term borrowings that increased significantly by almost 4.8 times over from the previous year, notes and accounts payable and deposits from customers in the banking business (Q10).
Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets as part of ongoing operations. Some of these leases have renewal and purchase options. Sony has both capital and operating leases. Sony has capital lease for the property such as land, building, machinery, and equipment. The minimum rental payment under the operating lease for the fiscal ended march 2007, 2008, and 2009 were ¥85,598 million, ¥87,040 million and ¥87,360 million respectively. Even though rental payments of ¥87,360 million are current liabilities which must be paid during the year, due to the off balance sheet nature it is not shown on any of the financial statement. Operating lease undervalued the current liabilities portions, including the operating lease actual current liabilities of Sony corporation in 2009 was ¥389.83 billion and total current assets was ¥362.06 billion, therefore, actual current ratio would be 0.93 times. This indicates poor liquidity conditions before and after the operating leases included on current liabilities (Q3 &Q43).
Sony provides for depreciation and amortization of property using declining-balance method for Sony Corporation including their Japanese subsidiaries, except for certain semiconductor manufacturing facilities and buildings whose depreciation is computed on the straight-line method over the estimated useful life of the assets. Property, plant and equipment for foreign subsidiaries are calculated based on the straight line method. Useful lives for depreciation range from 2 to 60 years for buildings and from 1 to 25 years for machinery and equipment. During the fiscal year 2009, Sony acquired total of ¥201,366 million intangible assets and total amortization of intangible assets was ¥173,215 million. For the Financial Business segment, deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies, while acquisition costs for the non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profit. Amortization charges of Financial Business segment for the fiscal year 2009 were amounted to ¥64,599 million. The accumulated depreciation on fixed assets amounts to approximately 66.51% of their total fixed assets at cost which is proof they are setting aside some reserve, but it also shows that their assets are fairly old. This could cause a future problem when assets are no longer useful and have not been replaced on a timely basis. This could cause a potential need for a large increase on purchases for assets in the future.
Sony’s 0.58% of their fixed assets is capital leased, while 15.48% of their fixed assets were off balance sheet that consists of ¥181,982 million of operating lease for approximately rental period of 9 years.
Goodwill includes the excess of cost over the estimated fair market value of the net assets of subsidiary company acquired by Sony. Goodwill totaled ¥443,958 million as of March 2009 and ¥304,423 million as of March 2008. Goodwill is considered to have an indefinite life and not amortized. The reason for the increased Goodwill in 2009 was that Sony acquired subsidiary company and Goodwill from that transaction was ¥164,868 million at the same year Sony had a loss on Goodwill impairment of ¥7,961 million. Goodwill is tested for impairment at least annually in the fourth quarter of a fiscal year.
Sony’s total assets was decreased by 4.3% in 2009 compared to 2008 the reasons was that company has high depreciation rate for the fixed assets. Though company did buy long-lived assets, they sold some portion of fixed assets in 2009. Total assets turnover ratio shows that for every $1 spends on total assets Sony generates 0.58 cents. This indicates that Sony has not been able to utilize their total assets properly. Sony usually owned their assets by themselves, therefore, only 2.24% of their total assets are off balance sheet (lease). This figure does not significantly inflate the assets turnover ratio. The total assets turnover ratio without including off balance sheet assets was 0.64 times while total assets turnover ratio including off balance sheet assets was 0.63 times. This figure clearly shows that Sony owned most of their total assets by themselves.
Liabilities
Sony’s account payables increased in the year 2009 almost by 16%, though we cannot distinguish between credit and cash sales and purchases, it is almost evident that the company is having difficulties paying its suppliers. Trade notes and accounts payable decreased significantly, the possible reason may be that they have increased cash business or they used a lot of cash to clear them. The financial service business which is mostly cash business seems to be spending more cash in advances in the last two years than it is receiving in payments from debtors. Generally Sony takes 50.6 days to collect their credit sales while the payables period is 46.9 days. This shows that the company is not efficiently managing its operations it would be better for the company collect more quickly and use the cash collected to pay the suppliers and finance other operations. On the other hand, if their suppliers offer cash discounts, Sony can take advantage of such discounts and pay within the period that qualify them for the discounts (Q9, Q10, & Q17). For Sony one of the cash source is deposit from customers in the banking business. Though it is liabilities and Sony has to return the deposit money on demand, for the temporary period of time they can take advantage from it.
During fiscal year 2009 Sony tried to change their strategy from Long-term borrowing to short term borrowing. Therefore they have been paying high amount of long term debt. In 2009 long-term debt decreased by 9.45% compared to 2008. For every dollar invested by shareholders, Sony acquires 0.22 cents of long-term debt for financing company’s assets. While the industry average long-term debt to equity is 0.24 indicates that Sony is less risky company compared to other company within industry. As mentioned above Sony finance some of its assets using off balance sheet debt their off balance sheet debt is 18.88% of total debt.
Sony’s minority interest in consolidated subsidiaries was 2.1% and 2.2% of total liabilities and stock holders equity in the year 2009 and 2008 respectively.
During the fiscal year 2009 value of Shareholders’ equity was ¥296.45 billion which was the reduction of equity value by 14.44% compared to 2008. The reason behind the fallen of equity value was drop down of stock market, poor performance of Sony, and economic downturn. Furthermore, Stockholders’ equity comprises almost 25% of other comprehensive income and treasury stock that value in fact reduces stockholders’ equity. Sony’s stockholders’ equity was approximately 25% of total assets meaning that 25% of total assets are finance by stockholders’ equity.
Management Assessment
Analysis of Sony consolidated statements of cash flows shows a decrease in net operating activities of ¥350,531 million. The reduction in net cash is directly related to net loss. Significantly increase of deferred income tax payment, decrease in account payable and other current liabilities has deflated the net cash as well.
Net loss has significant impact on decrease in operating cash flow. The change in deferred income taxes negatively impact cash flows in 2009. Changes in deferred tax could be the result of reorganization of a deferred tax liability from the preceding years. Sony cannot avoid the tax liability for forever but the worse thing for the Sony was that they had to pay for the deferred income tax on that year when they had a negative net income.
Changes in account receivable and inventories in fiscal year 2009 were primarily driven by decrease on revenue. Similarly changes on account payable and accrued income and other taxes is influence by their strategy. They are collecting money late and they made payments early. That is why company is facing trouble. Management needs to change their credit policy tighter so that they can self finance their operation. Depreciation and amortization has steadily decreased. This is consistent with their investment strategy of plant and equipment i.e. no purchase of plant and equipment in last three years.
Though Sony had a loss from most of their business unit, Sony had to pay momentous amount for deferred tax liability, and exchange rate fluctuations force them to reduce their product prices to be competitive, Sony was able to generate positive cash flow from operations. This shows the expertise of management committee to deploy their resources efficiently to get positive cash flow from their core business operations.
The major portions of Sony’s investment activities are generated from financial service business segment. The investment for financial services business in 2009 was ¥ 2,496,783 million of marketable securities at the same time; same segment collected ¥ 1,923,264 million as proceeds for investment in marketable securities. Sony generates investment for the marketable securities for other business segment excluding financial business segment. Investment on marketable securities comprise of debt as well as equity investment. Management’s decision only to invest on marketable security may prove risky therefore instead of putting all their investment on marketable security Sony may invest on other medium and long term investment considering their future cash requirement.
The significant portion of cash inflow to Sony was form Short-term borrowing. In fiscal year 2009 Sony shifted their strategy from long term borrowing to short term borrowing. Therefore, Sony’s large percentage of cash outflow was from the payment of long-term debt. They did issues long term debt in 2009 but amount was low compared to preceding years. Management’s decision to shift their strategy from long term debt to short term debt may cause problem. Even though short term financing has interest advantage, it has to be paid within a year and company required to borrow again. Company may not get enough borrowing when company need huge sum of money this will definitely ruin their business performance.
Sony has cash inflow from financial service segment basically from deposits from customers. Sony has increased their dividends paid out compared to last two year. Though company had a loss they increased dividends to attract investors.
Stock Analysis
Sony’s stocks are exchanged into four market places they are Tokyo Stock Exchange, Osaka Stock Exchange, New York Stock Exchange, and London Stock Exchange. Among them New York Stock Exchange and Tokyo Stock Exchange are the major market. Current stock price of Sony (SNE) in New York Stock Exchange as of May 7, 2010, 12:39 am is $33.20 per share. While the current stock price in the Nikki Stock market as of May 7, 2010, 12:45 am is 3030 per share. Sony has market capitalizations of $33.4 billion. Sony trades have a 52-weeks price range of $23.60 to $40.45. Beginning from the end of 2008 stock price continuously went down from $50 per share to down of $15 per share in March of 2009. The main reason for the drop down of the stock price was poor performance of Sony in 2009 with stock market and economic downturn (Q67). Currently Sony’s stock has increasing trends and their financial performance for all quarters of 2010 was very strong, therefore, there is a high chance for the stock prices to be going up continuously (Q70 & Q76). The current beta of Sony is 1.45 indicates that Sony is relatively risky company in the market. Since Sony has implemented unrelated diversity and continuously has been successful in the market, definitely Sony has potentials for the future growth; one of the Sony’s plans is to enter into remaining European Countries such as Slovakia, Spain, Hungary and Wales (Q68).
During fiscal year 2009, Sony did repurchase of 1.01 million of shares of common stock at a cost of ¥ 302 million and at the same time reissue treasury stock of ¥ 239 million by deducting ¥152 million from retain earning and ¥ 25 million from additional paid in capital (Q37). Sony does not have any plan to repurchase their stock for now; however, as per their 10K report Sony may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders, in accordance with the Japanese Companies Act (Q40). Sony also distributed stock base compensation of ¥3423 million in 2009 to their employees. Sony has four kinds of stock base compensation plan: stock acquisition right plan, convertible bond plan, stock appreciation rights plan, and warrant plan. During 2009 Sony’s employees exercise only stock acquisition right.
Dividends were distributed in fiscal year 2009 from the retained earnings. In 2009 Sony paid divided of $0.27 per share or ¥12.50 per share. The dividends have increased over the time from $0.23 in 2005 to $0.27 in 2009. However, in 2009 dividends decreased by 18.18% in comparison to last year. Sony has a good hold on how they handle their debt. The dividends that they paid were a good way to maintain investors in a poor performing year with bad economy (Q71, Q72 & Q75).
Sony Corporation did not issue any share during the fiscal year 2009 but the additional shares showed in the balance sheet were resulted from the exercise of stock acquisition right. Compared to 2008, Sony had 92,000 additional stocks and book value of common stock raised a little bit, by 0.03% from 630,575 million to 630,765 million. However, total book value of stockholders’ equity has dropped down by 14.24% from 3.412 billion to 2.926 billion (Q66).
Mostly analyst takes on Sony are buy/hold/accumulate. Although, 2009 was the bad year for the Sony, they have been restructuring their business to become more profitable as well as cutting cost which is appealing to investors.
The Basic EPS of Sony were (¥98.59) and ¥368.33 in 2009 and 2008 respectively. The reason for the negative EPS was the negative earning in 2009. In addition, the diluted EPS were (¥98.59) and ¥351.10 in 2009 and 2008. The reason for the decreased diluted EPS was that number of shares was affected by warrants and stock acquisition rights for the fiscal year ended 2008 (Q77).
Sony seems to be overvalued. Sony’s P/E ratio was (¥29.5) in 2009 was which point out that during that time investors had food buying opportunity as stock price was too low. However, investors could have undervalued the stocks and start investing on it that potentially increases the price. Even thought company has negative P/E ratios, now stock price has been increasing. However, it is not exactly to be beneficial for the company with higher P/E ratio. Higher P/E ratio indicates higher market price per share, but the company may not have higher earnings at the same time. Therefore, the higher P/E ratio seems not a good opportunity for the company (Q78 &Q80).
| | Yen in Million | |
| 2009 | Pro Forma | |
| Sales and operating revenue | 7,729,993.00 | 8,502,992.00 |
| | | |
| Costs and expenses | 7,932,667.00 | 8,234,062.00 |
| | | |
| Operating Income (Loss) | (227,783.00) | 268,930.00 |
| | | |
| Selling, General and Administrative Expenses | 1,686,030.00 | 1,601,729.00 |
| | | |
| Other income | 98,825.00 | 150,000.00 |
| | | |
| Other expenses | 45,997.00 | 36,798.00 |
| | | |
| Earnings (Loss) Before Tax | (174,955.00) | 82,132.00 |
| | | |
| Tax Rate | 80,521 | (33,674.00) |
| | | |
| Net Income (Loss) | (98,938.00) | 48,458.00 |
Pro Forma: Income Statement, Balance Sheet, and Cash flow Statement
Pro Forma Income Statement
Pro Forma Balance Sheet
| Assets | Yen in millions | |
| 2009 | Pro Forma | |
| Current Assets: | | |
| Cash and Cash Equivalents | 660,789.00 | 980,000.00 |
| Call loan in the bank business | 49,909.00 | 150,000.00 |
| Net of doubtful Account Receivable | 853,454.00 | 1,000,000.00 |
| Inventory | 813,068.00 | 850,000.00 |
| Other Current Assets | 1,243,415.00 | 1,142,876.00 |
| Total Current Assets | 3,620,635.00 | 4,122,876.00 |
| Investments and Advances | 4,798,430.00 | 5,400,000.00 |
| Property, Plant and Equipment | 1,175,863.00 | 1,000,000.00 |
| Other Assets | 2,111,706.00 | 2,210,000.00 |
| Total Assets | 12,013,511.00 | 12,732,876.00 |
| Liabilities and Stock holders’ Equity | Yen in millions | |
| 2009 | Pro Forma | |
| Short-term borrowings | 303,615.00 | 400,000.00 |
| Current portion of long-term debt | 147,540.00 | 150,000.00 |
| Notes and accounts payable | 1,597,625.00 | 1,500,000.00 |
| Deposits from customers in the banking business | 1,326,360.00 | 1,500,000.00 |
| Other | 435,760.00 | 429,077.00 |
| Current Liabilities | 3,810,900.00 | 3,979,077.00 |
| | | |
| Long-term debt | 660,147.00 | 518,000.00 |
| Accrued pension and severance costs | 365,706.00 | 300,000.00 |
| Future insurance policy benefits and other | 3,521,060.00 | 3,700,000.00 |
| Others | 439,096.00 | 400,000.00 |
| Total Liabilities | 8,796,909.00 | 8,897,077.00 |
| | | |
| Minority Interest in consolidated subsidiaries | 251,949.00 | 280,000.00 |
| | | |
| Stockholders' Equity: | | |
| Common stock | 630,765.00 | 630,765.00 |
| Additional paid-in capital | 1,155,034.00 | 1,155,034.00 |
| Retained earnings | 1,916,951.00 | 2,150,000.00 |
| Other comprehensive income | (733,443.00) | (380,000.00) |
| | | |
| Total Liabilities and Stockholders' Equity | 12,013,511.00 | 12,732,876.00 |
Pro Forma Cash flow Statement
| | Yen in millions | |
| 2009 | Pro Forma | |
| Operating Activities: | | |
| Net income | (98,938.00) | 48,458.00 |
| Depreciation and amortization | 561,156.00 | 489,000.00 |
| Increase in Current Assets | | (283,569.00) |
| Decrease in Current Assets | | 100,593.00 |
| Increase in Current Liabilities | | 271,265.00 |
| Decrease in Current Liabilities | | (35,762.00) |
| Deferred Taxes | (153,262.00) | 50,000.00 |
| Others | 10,028 | (13,000.00) |
| Cash From Operations | 407,153.00 | 626,985.00 |
| | | |
| Investing Activates: | | |
| Payments for investments and advances by financial service | (2,496,783.00) | (2,180,000.00) |
| Payments for investments and advances by non financial | (178,335.00) | (150,390.00) |
| Captain expenditure | (496,125.00) | - |
| Proceeds from investment and marketable securities | 1,923,264 | 1,860,000.00 |
| Others | (605) | (3,000.00) |
| Cash From Investing Activities | (1,081,342.00) | (473,390.00) |
| | | |
| Financing Activities: | | |
| Net issuance of Debt (short-term borrowing) | 244,584.00 | 96,385.00 |
| Payments of long-term debt | (264,467.00) | (150,000.00) |
| Dividends | (42,594.00) | (35,000.00) |
| Increase in deposits from customers in financial service business | 261,619 | 173,640.00 |
| Increase in call money and bills sold in the banking business | - | 100,091.00 |
| Proceeds from the issuance of shares under stock-based compensation | 378.00 | 500.00 |
| Cash From Financing | 660,789.00 | 185,616.00 |
| | | |
| Effect of exchange rate changes on cash and cash equivalents | (18,911) | (20,000.00) |
| Beginning Cash | 1,086,431.00 | 660,789.00 |
| Net increase (decrease) in cash and cash equivalents | (425,642.00) | 339,211.00 |
| Change in Cash | 660,789.00 | 980,000.00 |
References
Business week (2010). Sony Corp-sponsored ADR. Retrieved May 01, 2010 from
Bullik, S.B.(2009). How Sony E-Reader lost to kindle and how it’s battling its way.
Fritz, B. & Eller, C. (2010). Sony pictures to cut 450 workers as DVD sales
Kageyama, Y. (2008, October 23). Sony cuts forecasts on currency, sales decline: USA Today
MacManus, C. (2008). Sony to Raise Prices In Europe. Wall street Journal. Retrieved May 01,
Overview of Financial Statement Analysis (2009). Avenue of the Americas, NY: McGraw Hill
(10th ed.). Authors: Irwin Subramanyam, K.R., & Wild, J.J. (2009).
Reuters (2010). Sony Corporation. Retrieved on May 01, 2010 from
Reuters. Financials: Sony Corporation (SNE.N). Retrieved on May 1, 2010 from
Appendix 1: Assumptions
1) Economy will continue to grow.
2) Current Exchange Rate: $1= ¥94.43.
3) Sales increased by 10%
a. According to Wall Street Journal, Games sales in 2010 will increased by 44%
· Inventory will increased by 2%
· Net Receivable will increased by 4%
b. Sales of LCD television will increase by 33% to 20 million units.
· Advertising, Sales, and marketing cost increased by 1%
· R&D cost increased by 1%
4) Cost of Goods sold will be approximately 79% of Sales: Assuming it will increase slightly compare to previous three years because of increased sales of games and LCD television.
5) Selling, Administrative and general expenses will go down by 5%.
a. According to Wall Street Journal, Sony has reduce its cost by eliminating 20,000 jobs and overhaul its Supply chain to reduce cost by ¥330 billion.
b. According to 10k report, Sony has been restructuring their business to cut cost.
6) According to news release of Sony Corporation, financial service segment anticipated to exceed their performance primarily due to improvement in Japanese stock market by ¥15 billion in fiscal year ended 2010.
7) Value of inventory will go up as Sony does not have enough closing inventories they have to buy more in 2010.
8) Account Receivable will go up as Sales go up.
9) Assuming company will continue their strategy to shift from long term financing to short term financing. Short term borrowing will go up.
10) According to Sony Corporation, They don’t have any plan to repurchase stock as well as to issue new stock.
11) Assuming Stock market will go up. Some Corporate level employees will exercise their stock base compensation right and convertible bonds options that will impact shareholders equity value.
12) We assume that Company will not add any fixed assets during 2010.
Appendix: 2 Dividend History of Sony
| Payable | Amount /Share |
| 12/08/2009 | $0.139 |
| 06/09/2009 | $0.13073 |
| 12/08/2008 | $0.21261 |
| 06/09/2008 | $0.11916 |
| 12/10/2007 | $0.11263 |
| 06/08/2007 | $0.10236 |
| 12/08/2006 | $0.09911 |
| 06/08/2006 | $0.11042 |
| 12/08/2005 | $0.11297 |
| 06/08/2005 | $0.1196 |
Appendix: 3 Questions on Sony ratios
1) Current Ratio:
1. How liquid the Sony Corporation is?
2. Is Sony able to meet its short term obligations? (How Sony will meet excess short term obligations?)
3. Does Sony has high amount of off balance sheet item and does it affect the financial performance of the Sony Corporation?
4. Why do Sony’s current assets and current liabilities decreased in the year 2009?
5. Have inventories for Sony increased or decreased in the last three years? (Does any inventory of Sony is off balance sheet?)
6. How does Sony supplement its operations given its current liabilities are more than current assets?
2) Quick Ratio
7. Is the company currently over financed?
8. Why company’s doubtful reserve for receivable increasing in 2009?
9. Dose Sony has sufficient cash and cash equivalent? Do they utilizing Cash effectively?
10. What is the average payment period for its liabilities?
11. What are the major forces affecting liquidity position of the Sony?
3) Inventory Turnover Ratio
12. What methods of inventory costing are Sony using, LIFO, FIFO, Average costing? If LIFO then does it affect inventory turnover by understating inventory value?
13. Does Sony valuing inventory appropriately? Lower cost or market equivalent cost for replacement of inventories?
14. Is company holding reasonable amounts of inventory?
15. Do Seasonal factors affect how quickly inventory is moved?
16. Was there a drop in the inventory value over the year? If so, what was the reason behind it, increase in Sales, obsoleteness, restating the value based on current market price?
4) Accounts receivable Turnover
17. Does Company’s credit policy liberal or tight?
18. How long does Sony take time to receive the credit sales?
19. Why Sony’s reserve for doubtful debt increased?
20. Is Sony being able to collect all of its receivable?
21. Why does Sony’s receivable decreased? Is it because sales go down, increased bad debts, increased in reserve for bad debts?
5) Fixed assets Turnover
22. Are Sony’s fixed assets adequate for them to run their operation smoothly?
23. What kind of depreciation method Sony is using for fixed assets? Is the depreciation rate adequate or too low compare to the life of the fixed assets?
24. Based on the age, method of depreciation, are they setting aside enough reserve to purchase or reinvest in new fixed assets?
25. What percentage of fixed assets does Sony lease?
26. What percentage of fixed assets is in the Balance sheet? Sony owned by themselves?
6) Total assets Turnover
27. Are all assets using to their full potential to contribute on sales?
28. Are assets and sales growing at the same rate or do they utilizing their assets more or less efficiently to achieve the level of sales?
29. What are the major investing activities?
30. How much of the total assets are off balance sheet? As these assets can inflate the assets turnover ratio.
31. What is other assets and why it is increasing in the year 2009?
32. What is construction in progress and why it is increased in 2009?
7) Working Capital Turnover
33. How well the company be able to self finance its working capital?
34. Why Sony has negative working capital in 2009?
35. Is Sony’s working capital large or small? What are the reasons on it?
36. Was Sony’s inventory converted into cash more rapidly this year than previous year?
37. Was receivable collected on time? What percentages of Sony’s sales were credit?
8) Debt to Equity Ratio
38. Did Company buy back shares this year? If yes, how did they finance this activity and was it most advantageous methods?
39. Did Company increase their financial activities to generate more cash?
40. How leverage the Sony is compare to its competitors?
41. Does Company have any plan to buy back share?
42. How does the foreign exchange rate fluctuation affect the value of its stock? Why the losses from the foreign exchange rate high in 2009?
9) Long term debt to equity
43. Is the company pushing out loans at longer terms with higher interest than the assets useful life?
44. Does the company have higher amount of off balance sheet leases?
45. Does the amount of long term debt changed significantly during the three years period?
46. How much of the shareholder’ equity comprised with other comprehensive equity (such as treasury stock, foreign currency translation adjustments, pension liability adjustment)?
47. What is the effect of Minority interest on shareholder equity?
10) Return on Assets
48. Are the assets that are on the books mainly financed or owned?
49. What percentages of total assets are comprised of non-operating assets?
50. Are they depreciating assets strategically or is the company reinvesting in its assets appropriately with the depreciation being applied on assets?
51. Does Sony have deferred tax liabilities and other deferred liabilities?
52. Is Sony’s ROA higher than industry and market?
11) Return on Equity
53. Has Sony been profitable enough to pay dividend to preferred and common shareholder?
54. Is net income increased or decreased in 2009?
55. Did Company repurchase company share to increase return on equity?
56. Why does the value of shareholder’s equity decreased in 2009?
57. Is Sony profitable compared to other companies in the industry?
12) Gross profit Margin
58. What are the reasons for decreasing the sales revenue? Is it because of economic downturn or other forces?
59. What is the correlation of revenue and expenses and are they growing at the same rate?
60. Does company be able to manage their expenses as the sales go down?
61. Are the company’s sales on account receivable?
62. Is the company more profitable compared to previous years?
13) Net profit Margin
63. What are the reasons for negative net income?
64. Are there any nonrecurring items that affect Net income? (i.e. extraordinary items, discontinued operations, assets impairment, restructuring charges and others) If yes, are they justified?
65. How much and what aspects of expenses could they manage to contribute on net profit?
66. What is the financial service revenue and financial services expenses? Why expenses have been exceeding then the revenue?
14) Price to Book value ratio
67. Did the company issue new shares this year changing the book value from last year?
68. What is the effect of negative net profit on market price of Sony’s stock?
69. Is the market implying the company is a high risk, has the potential for future growth, or will remain stagnant?
70. Has the distribution of dividends encourage investors to buy more stock which will increase the current stock price?
71. Is there potentially of increase or decrease in stock price in future?
15) Dividend Yield per share
72. Was there dividend distributed?
73. Was the divided distribution part of the company’s plan? Was it what the market expected?
74. Is the current dividend enough to cover required rate of return for investors?
75. Could the money distributed on dividend have been put to better use within the company? (to lower current debt or short term borrowing, to reinvest in company to grow)
76. Did the company paid dividend from retained earnings or they have reserve for dividend because the Company’s profit was on negative?
16) Price to Earning
77. Has the price per share increased over the past year or fallen?
78. How earning per share decreased in 2009 compared to 2008?
79. IS the company undervalued or overvalued?
80. How is company performing compared with its competitors?
81. What the P/E ratio tells the shareholders? Is it beneficial for the company to be higher P/E ratio?
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