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What else can go wrong for Sony Corp. (NYSE ADR: SNE)?
After years of struggling to invigorate its turnaround strategy, Sony got slammed with Japan's March 11 earthquake and a devastating hacker attack on its PlayStation network in April.
The quake forced Sony to take tax credit provisions in its March quarter that resulted in a $3.2 billion loss for its 2011 fiscal year – the once-dominant consumer electronics company's third consecutive annual loss.
Investors have grown increasing disenchanted with Sony, sending the stock down about 30% this year. It has made several new 52-week lows in the past few months, most recently touching $24.21 on June 24. In 2008, the stock was trading at more than $50 a share.
Sony said last month that the combination of the March 11 disasters and the hacker attack would erase $2 billion from its operating profit in the current fiscal year, though it still forecast a net profit of just under $1 billion.
The earthquake forced the company to close nine factories in Japan, severely disrupted its supply chain, and depressed domestic sales.
The hacker attack — apparently a response to Sony's lawsuit against hacker George Hotz, who posted instructions on how to circumvent the PlayStation 3's copy protection — was less costly financially but far more damaging to the company's reputation.
The company estimated the attack compromised the personal data of some 100 million customers of its PlayStation and related online services. The incident forced Sony to shut down the network for weeks, and the company was harshly criticized for its lax security and sluggishness in notifying affected customers.
Worse yet, several more attacks followed on Sony-operated Brazilian and European Websites in May and early June.
"Sony may face a bigger expense to strengthen its security system if these hacking issues are prolonged," Hideki Yasuda, a Tokyo-based analyst at Ace Securities Co., told Bloomberg News. "The company's brand image may suffer, pressuring sales."
Unaccustomed to hard times, Sony has long had a reputation for quality and innovation in consumer electronics, giving the world affordable transistor radios in the 1950s, the portable Walkman tape player in the 1970s, the Handycam camcorder in the 1980s and the PlayStation in the 1990s.
But over the past decade, Sony began to surrender its leadership position in categories it had long dominated. Samsung Electronics LTD (PINK: SSNLF) now leads in televisions; Apple Inc. (Nasdaq: AAPL) rules the world of portable media players; and in video game consoles, Sony lags behind both Nintendo Co. (PINK ADR: NTDOY) and Microsoft Corp. (Nasdaq: MSFT).
Six years ago CEO Howard Stringer was brought in to restore Sony to its former glory, but instead the company has continued to founder.
Stringer's most recent round of restructuring in 2009 resulted in thousands of layoffs and the streamlining of manufacturing, which helped stabilize the company but did little to build a foundation for future growth.
"The hacker attacks hurt its brand, but the problems go beyond that," Naoki Fujiwara, a fund manager at Shinkin Asset Management Co., told the Wall Street Journal. "I think Sony wanted to do something similar to what Apple did, but it's always been one step behind."
Many of its divisions are under pressure of one kind or another. Sony's TV business, for example, grew 44% last year but profits suffered from falling prices as competition intensified. The TV division will likely remain a money-loser for the eighth straight year.
What Sony needs are hit products in its various divisions – a "gotta-have-it" device or a run of blockbuster movies from its Sony Pictures Entertainment subsidiary.
Although Sony has some promising products in the pipeline for this year – a portable version of its PlayStation, Next Generation Portable (NGP), and two tablets that will run Google Inc.'s (Nasdaq: GOOG) Android operating system – both will enter already-crowded fields.
Adding to the strain is the ever-strengthening yen, which has increased 10.6% against the dollar over the past year. The stronger yen eats into the profits of Japanese companies that thrive on exports, and almost 70% of Sony's revenue comes from outside Japan.
"Looking at their forecast, it appears Sony is expecting a recovery in the latter half of the year, which is a bullish forecast, but there's a lot of uncertainty and there is a risk they come in below that expectation," Koji Takeuchi, senior economist at Mizuho Research Institute, told Reuters.
About the only silver lining for Sony's stock is its 0.80 price-to-book ratio. Basically, the total assets of the company are worth more than its market capitalization, meaning it's undervalued.
Yet investors continue to stay away.
At a shareholders' meeting yesterday (Tuesday), CEO Stringer said the company retained its faith in its strategy of integrating its hardware, content and services, even though that strategy has yet to yield significant dividends.
"My foremost responsibility to the board and all of you is to further advance the transformation process, firmly establish Sony's position as a global product, content and service leader in the networked digital era and ensure our continued development and growth," Stringer told shareholders.
But to many, Stringer – and Sony Corporation – seems to be running in place.
"Sony needs a shock from the outside," Hideki Yasuda, a senior technology analyst at the Ace Economic Research Institute, told The New York Times. "Stringer was supposed to be that shock, but perhaps Sony needs an even bigger shock."
News and Related Story Links:
- Money Morning:
Economic Aftershocks of the Japan Earthquake
- Money Morning:
Japan Disaster Update: Crisis Investing Strategies From Money Morning's Top Experts
- The Financial Times:
Sony restructuring has unfinished business
- The Wall Street Journal:
Sony Shareholders Believe in Yesterday
- Bloomberg News:
Sony Cuts Pay for Stringer, Hirai After Posting Third Straight Annual Loss
- The New York Times:
Sony Swings to Big Loss After Natural Disasters