Sharp Corp's Record Fiscal Year Results Illustrate Challenge of Expanding Profitability in High-Tech CE (SHCAY)

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Sharp Corp's (SHCAY.PK) full fiscal year earnings (year-ended March 31, 2006) look pretty nice at first glance and actually set new records for sales and net income for the third consecutive year. Net income increased by 15.4% y-o-y, operating income +8.4%, and net sales +10.1%. Net income per share came in at 80.85 yen versus 70.04 yen last fiscal year. However, in order to make money you usually have to spend money and spend is what Sharp did to the tune of a 10.5% increase y-o-y in COGS and 9.1% in SG&A. The Japan Times reported that 148 billion yen of 219 billion yen (68.0%) in investments was allocated to LCD TVs, of which sales increased 33.0% y-o-y.

Sharp's profitability growth was less impressive where on a y-o-y basis Sharp maintained its 5.9% operating margin and added 0.2% to its profit margin now at 3.2%. The Nikkei Shimbun commented that although Sharp's 5.9% operating margin is ahead of an estimated 4.5% by rival Matsushita Electric Industrial (NYSE:MC) it lags Samsung's 11.5% (Note: that figure was reported for the quarter-ended this past March). Sharp's operating income increase of 8.4% is respectable but a significant drop from the 20-30% level it achieved from Mar. '03-Mar. '05. The Nikkei article points out the obvious that intensifying competition is resulting in a huge CAPEX necessity in order to not only meet demand but also to innovate ahead of rivals while simultaneously reducing unit costs. Sharp remains committed and announced it will focus on larger screen LCDs going forward in order to boost margins (see its financial forecast for the current fiscal year below).

As of the fiscal year ended March 31st, Sharp had 299.47 billion yen (US$2.6b) in cash and cash equivalents, an increase over last fiscal year by 1.5%.

Sharp's forecast for the fiscal year ending March 31, 2007 is as follows (projected increase in parentheses):

    • Net sales: 3 trillion yen [US$26.1b] (+7.3%)
    • Operating income: 180 billion yen [US$1.57b] (+10.0%)
    • Net income: 100 billion yen [US$870m] (+13.0%)
    • EPS: 91.67 yen [US$0.80] (+13.4%)
    * I used a conversion rate of Y115/US$1 for convenience.

Sharp said it will increase its year end dividend by 2 yen for a total of 12 yen, meaning its annual dividend for FY2005 will be 22 yen (including the 10 yen interim dividend).

Sharp's ordinary shares (Tokyo: 6753) are up 1.5% intra-day at 2,045 yen following the firm's earnings release after yesterday's market close. With its revised year-end dividend Sharp has a yield of 1.08%. Its TTM P/E is 25.3 versus the 28 to 29 it was before its latest earnings release. Its forward P/E is 22.3.

Sharp's ADRs gained 1.71% today to close at $17.80. Over the past year it has traded between $13.40 and $19.70.

I believe Sharp's latest financials have proven the company can remain profitable, generate cash and still squeeze out growth in the face of huge CAPEX. With its new strategy of focusing on larger screen LCDs there appears to be at least a 10% (to 13.4%) upside to its ordinary share price. For American investors this upside could be even larger due to what will seemingly be a stronger yen against the dollar for the remainder of the year on into 2007.

Visit Sharp's IR site for links to its earnings release, dividend increase, and newly introduced anti-takeover plan.

Sharp Corp (OTCPK:SHCAY) 1-yr chart:

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Tagged: , Electronic Equipment, Japan
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