Sony Corp, reeling from the effects of this winter’s earthquake and tsunami, reported a preliminary $3.2 billion loss for the fiscal year ended March 31 – its biggest in 16 years. But shares of the entertainment giant rose nearly 5 percent in trading on Tuesday to $27.90.
The gain reflects confidence that Sony – which also disclosed Tuesday that web sites in four countries were hacked – has the ability to bring its operating income back up to historic levels. Sony CEO Howard Stringer said he expects the company to swing to an operating profit for the fiscal year ending March 31 2012.
Many investors believe that the company, whose shares are down from a 52-week high of $36.97, is undervalued. Macquarie, the Australian investment bank, raised its rating on Sony to 'outperform' from 'neutral.' And at least one market strategist believes Sony could even be a candidate for a leveraged buyout.
Vadim Zlotnikov, chief market strategist at asset manager AllianceBernstein, says that Sony has been trading on near-term earnings and expectations. But the company’s normalized cash flows, a longer-term metric that emphasises historical profitability and capital over one-time events, are higher than recent earnings. The company lost $2 billion in business from this year’s natural disasters alone.
In April, hackers hit the company’s web sites and possibly gained customer information from 100 million accounts linked to the services such as the Playstation network and the Qriocity music and entertainment streaming service.
“Sony has realized near-normal EBITDA margins in 2010, but has been hurt by expectations of weaker profits during the next couple of quarters. So if we see Sony simply return to recent levels of profitability, the stock should be able to recover to levels observed just 4 months ago or $36 to $37,” Zlotnikov said.
Sony might even be a candidate for an LBO, given its free cash flow yield of around 10 percent, considered the minimum level needed to justify a buyout, according to Zlotnikov.
Sony estimates it had $2.5 billion in operating income and $88 billion in revenue, down about 0.5 percent. Operating income missed analysts' estimates, according to Bloomberg. The forecast for next year is for operating profits to remain in the current range and for a likely rise in profits.
The company is counting on its online entertainment services and a new computer tablet to boost revenue, Stringer said earlier this year.
With a market cap of $28 billion, Sony “is at the very top end of what would constitute a viable LBO,” Zlotnikov said.
It also might be a candidate for breakup, on the theory that the parts of the company would be worth more than the whole. The company also might simply return to normalized levels of cash flow, relieving pressure for a breakup, a buyout or some other sort of M&A event.
“The stock is extremely attractive on the basis of normalized cash flows,” Zlotnikov said. “I hope that recent events have created sufficiently low expectations and valuations that the company can show improvement before the end of this year.”
