Sony Should Remain On Track Despite Dell Battery Recall

Includes: DELL, SANYY, SNE
by: Steven Towns

In today's Wall Street Journal Asia print edition, Yukari Iwatani Kane comments on the potential costs for Sony related to Dell's notebook battery recall in HEARD IN ASIA: Sony's Computer-Battery Recall Likely Won't Unplug Its Revival.

Early last week Dell announced the computer industry's biggest recall ever, recalling 4.1 million lithium-ion notebook PC batteries made by Sony because of possible overheating and fire risks. Analysts estimate the recall could cost Sony between $200 million and $400 million if every battery is returned and if Sony pays 100% of the bill. Sony has previously forecast full year operating profit of 100 billion yen or $864 million.

In the first 24 hours after announcing the recall Dell received 90,000 requests for replacements world-wide. Typically only about 10-30% of products are returned in a recall but this number could be much higher for Dell since its sell directly to customers and thus can more easily contact them. At any rate, some analysts say the recall will be a special charge and thus won't have any effect on Sony's operating profit.

At this point analysts seem more concerned about Sony's number two position in lithium-ion battery production than its earnings, given the importance of retaining important customers. Its battery-making unit is a small part of Sony group accounting for less than 2% of 7.16 trillion yen ($62b) in revenue last year. A positive spin for Sony is that other notebook PC makers have said they don't plan on issuing recalls. Although some analysts wonder if the recall could have broader implications for the lithium-ion battery industry.

Comment: Sony's ordinary shares (Tokyo: 6758) ended last week up 2.9% but fell 1.3% yesterday while gaining 0.40% today to close at 5,260 yen ($45.47). Sony's ADRs (NYSE:SNE) are listed on the NYSE and closed yesterday at $45.29.

The battery recall comes at a bad time for Sony as it just reported a return to profitability in Q1 and is readying for the launch of the PlayStation 3 this November. The recall seems it would also be a negative development for the world's biggest producer of lithium-ion batteries, Sanyo Electric (OTC:SANYY). As it continues to restructure the firm has said its battery unit will remain a core business. However, the market seems to like Sanyo as its ordinary shares (Tokyo: 6764) gained 3.75% today after gaining 5.2% last week.

The WSJ article mentions Macquarie Securities has an "outperform" rating on Sony with a 6,800 yen ($58.79) target. Deutsche Securities has a "buy" rating and Morgan Stanley has an "equal-weight" rating. FISCO news of Japan reported last Friday that Merrill Lynch raised its target to 4,700 yen ($40.63) from 4,300 yen while maintaining its "sell" rating, citing concern over dependence on consumer spending in North America.

See Sony Could Get Burned By Dell Notebook PC Batteries and click here for a list of Sony articles on Seeking Alpha.