There are several companies suffering in Japan. Many of them trade at low valuations. Are these valuations low enough to compensate for the problems many of these firms face? Do investors in the United States have better investment opportunities outside of Japan?
Sony (NYSE:SNE) has suffered declining sales. Sony has cut its annual TV sales target drastically, from 17.5 million to 15.5 million units. Sony has lost about $8.8 billion since early 2004. Even after admitting these problems, Sony is hopeful that it can turn its business around.
For one, Sony is taking on a $640 million investment in Olympus while looking to dispose of its chemical products division and other non-core businesses in order to cough up some cash. Sony plans to recover from a string of losses through reorganization of business holdings. This will likely prove difficult against fierce competition from LG Electronics and Samsung.
According to its CEO, Sony's television products will help drive a turnaround based on a shorter list of fewer television models designed to recoup losses by 2014. Sony's CEO promised to keep the TV business running, and spotlighted the new 84-inch Sony Bravia, which will soon retail near $21,500 in Japan. (That's the dollar equivalent price, not the Yen price!) Based on 4K technology, the new Bravia will display images with more definition than current high definition TV models. Sony is hopeful that large high definition TV sets will be in much great demand in overseas markets, using enormous high-resolution images to pull buyers in.
Problems for Sharp
Sony's problems are small when compared to many other Japanese companies. Sharp (OTCPK:SHCAY) recently failed to get a $8.43 billion investment from the Terry Gou Foxconn Technology group. In response, the company is considering seeking help from Innovative Network or the State Enterprise Turnaround Initiative. Following the fall in demand and competition in the industry, the company lost over $1.29 billion from their first half operations. The decline of the electronics industry is likely to have negative consequences to the economy. President of Facoku Capital Markets Yuuki Sakurai said, "If Sharp fails, there will be a lot of job losses, including those at suppliers, and the impact of that can't be ignored." Sharp recorded their worst decline of 77% this year with their shares falling by 6.7%. Lack of innovation to counter products from Samsung and Apple forced the company to shut down a number of their factories and fire its employees. The only viable way forward for sharp is to increase their capital. With the deterioration of the electronic industry, there are rumors that Renesas Electronic (OTCPK:RNECF) may also be taken over by another group led by INCJ in November. With the government facing so many industries in need of resources, it may prove more difficult to bail out Sharp.
Japanese Tech Firms in Trouble
The bond price of Sharp debt implies a 94.9% chance of defaulting in five years. Not surprising, Sharp's bonds are rated below investment grade. This follows their $5.6 billion loss reported last year which has cast doubts on its long term survival.
Sharp is not alone. Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank said, "It won't be easy for Japanese electronics companies to recover because the center of gravity in the industry is shifting to developing Asia." Panasonic (PC) was forced to skip its annual dividends after predicting their biggest loss in history which amounted to $9.6 billion. This result prompted S&P to reduce the rating of Panasonic debt to BBB. Koji Toda said, "Japanese electronics makers have lost superiority because they are competing in markets where the advantage goes to whoever can mass-produce products at cheaper prices."
The Japanese should take measures to ensure the value of their brands. Companies in Japanese are not taking advantage of innovation to counter products from companies such as Samsung and Apple (NASDAQ:AAPL) and the post war effect of the Japanese Yen has also weighed on the success of these firms.
Hopefully Sharp is not a preview of what the future holds for other Japanese technology firms. "From the market's perspective, Sharp is in extreme danger of going out of business," said Taketoshi Tsuchiya. In case 27% of investors manage to get their bonds back, there is high likelihood for Sharp to default in five years' time. According to Bloomberg data, Sharp will have to pay back $7.1 billion in 2013 and $1.63 billion in 2014. Sharp is negotiating with Apple, Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) for a partnership.
Japanese or Global Firms? Panasonic and Sony are Japanese stocks. The retail investors of Japan have grown fearful of stock market crashes and refuse to bid up stock prices. This disgust towards equity investments results in low price multiples for Japanese stocks. This may be an opportunity for global investors. To be fair, demographics and government debt/GDP ratios are terrible for Japan. These stocks generate revenues (and hopefully earnings) from multiple countries, not just Japan. Investors can buy a global multinational cheaply merely because their corporate headquarters are located in Japan. Outside of property right or legal issues, the macroeconomic for Japan does not rule out investment in Japanese-domiciled stocks any more than it would for Intel (INTC) or Apple. Today's sophisticated investors should have come to realize that the world is flat. Investors who fear the Yen's high value can hedge their currency risk by buying put options on the Yen.
Financial metrics for the following technology companies were compiled for comparison to Panasonic and Sony:
On a price-to-sales and price-to-book basis both Panasonic and Sony are cheaper than many non-Japanese turnaround plays like Hewlett-Packard (NYSE:HP) and Nokia (NYSE:NOK). Of these firms, investors should consider Sony given its meaningful changes towards a new strategy.
This would be a very speculative bet. Sony is much more speculative than other technology names, which are safer. Intel and Apple are each less speculative but still cheap.