Could Sony Be On The Road To Bankruptcy?

Nov. 7.11 | About: Sony Corporation (SNE)

Sony (NYSE:SNE) has dropped 18% since October 28, 2011. The sell-off was mainly due to the company's disappointing second quarter results. Sales decreased year-on-year, mainly due to the negative impact of the exchange rate and the decreasing sales of LCD TVs. CPS segment sales decreased 12%. This was primarily due to LCD TV sales price declines, resulting mainly from deterioration in market conditions in the Western markets, unfavorable foreign exchange rates and lower PC sales which reflected price competition. Operating loss was ¥34.6 billion, compared to plus ¥1.0 billion in the same quarter last year. This decrease was driven primarily by deterioration in the cost of sales ratio and decreasing gross profit resulting from the decrease in sales.

The company's game business sales, which include network service revenues, decreased year-on-year due to the strategic price reduction of PS3 hardware undertaken in August in advance of the year-end holiday selling season. The PS2 business as a whole continues to have steady demand in developing countries, but has peaked out and is shrinking. Operating income for the game business has decreased year-on-year as well. Although Sony continues to reduce the manufacturing costs of PS3 hardware, operating income decreased due to the change in the price of PS3 hardware.

The Professional, Device & Solutions segment saw sales decrease 11%. The decrease was mainly due to the decrease in sales of the component category, where batteries and storage media sales decreased due to the impact of Great East Japan earthquake.

Sales in the Music segment decreased 7% and operating income decreased 22%. Sales decreased due to the appreciation of yen and a decrease in album sales outside of the United States. Operating income decreased, due to a significant increase in restructuring charges aimed at future growth. This was partially offset by a benefit from the recognition of digital license revenue. I expect this to continue to be a challenging business for the company.

Sony plans to buy Ericsson (NASDAQ:ERIC) out of its mobile handset venture. Sony will pay Ericsson $1.47 million for its 50% stake. Sony is looking to incorporate its wireless business into its other business segments like TVs, PCs, tablets and laptops. Sony is looking to better compete by enhancing its connectivity between all devices. The company also plans to better maximize the Sony brand with its wireless devices.

I'm bearish on Sony and don't see any reason for a sudden change in the company's future. Many of the company's business segments are tied to the economy and with a recovery not likely to happen anytime soon, Sony will struggle to achieve profitability. The TV business is essential for Sony’s future growth strategy. This segment has continuously recorded losses for the last seven fiscal years.

Sony is trying to turn its business around but doesn't plan to reach profitability until 2013. Sony may successfully execute its turnaround and avoid bankruptcy but will suffer until 2013. The company updated forecasts and consolidated sales for the fiscal year are expected to be significantly below the July forecast. This is primarily due to updated foreign exchange rate assumptions to account for the further appreciation of the yen, the impact of the floods in Thailand, and the impact of the lower expected sales in Europe and the United States. I will look to short rallies until I see signs of the company's turnaround.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SNE over the next 72 hours.