The Disturbing - Sony (JP:6758)

Gonna skip presenting the company, as we all know it too well. It's a Sony.

Only going to mention, that Sony's got a business segment that not many people know about. That is financial services (e.g life insurance) and is the only one, which is significantly contributing positively to its bottom line. 

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Personal Remarks

 

I haven't had a post so far, where I am not convinced of the business. While writing this lines, I've already got the feeling  that this post is not going to be a a big hit. The only nice thing about this anlaysis is, that Sony's got an investor relation section, where annual reports are going back to the 60's. 

http://www.sony.net/SonyInfo/IR/financial/ar/Archive.html 

So far, the only fun about this post has been to see all the products I used to get mad about as a kid, just the same frenzy that is happening now with Apple's products.

Analysis of Operation

 

Boy. Sony, what a hell of a ride for your investors.

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That is how it looks like, when management is focusing on top-line growth and neglecting the bottom-line.

The averages (28 years) aren't any more beautiful. Average gross margin is 70%. Average operating margin is 3,77%. And average net-margin a paltry 1%. How ugly!

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EPS, ROE and ROA is a nightmare as well. Averages don't brighten the picture neither.
EPS (aver.) is ¥ 77 ==> aveage P/E of 13. Standard deviation in EPS is huge.
ROE (aver.) and ROA (aver.) is 2,92% and 1,15% respectively.

And one can't say ROE metrics are distorted due to overcapitalisation (see balance sheet analysis)


Analysis of Cash-Flow

Cash-flow metrics aren't looking as ugly as operational metrics. Surprisingly (or not), they are quite good.

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Since 1997 Sony has been able to increase operating cash-flow significantly. Unfortunately, capex increased too. Free cash-flow is highly volatile at Sony.

Average OCF is ¥ 518 ==> Average P/OCF 2
Actual OCF is ¥ 517 ==> P/OCF (actual) 2

Average FCF is ¥ 132 ==> FCF yield (average) 13,2%

Actual FCF is ¥ 136 ==> FCF yield (actual) 13,6%

Free cash-flow has been negative 10 times out of 28 .

Key for getting ones head around the huge gap between operational metrics and cash-flow metrics are depreciation charges, which are enormous at Sony.

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For example in 1995 Sony depreciated 219'836 millions of yen on a net income of  15'298 millions of yen. That is a depreciation charge of 1'563 % over net income!!! What the heck...


Balance Sheet Analysis

Here it is getting rather ugly again. Especially the liquid position in Sony's balance sheet is constantly detoriating and, if the trend is maintained, will get precarious in the coming future.

Since 1998 current liabilities are rising faster than current assets, putting constant pressure on its current ratio (=current assets/current liabilities) and asset test (current assets/(current liabilities-inventory). 

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Long term debt and interest bearing debt have been rather stable in the last 10 years.

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The significant rise in total liabilities should be mainly attributable to expansion of Sony's insurance business. But I am not sure, as I didn't dig any deeper into the balance sheet regarding total liabilities.But the explosion of long term investments seems to support my hypothesis.

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Although, Sony has been able to grow book value at an average rate of 7% p.a (last 23 years), I am shying away from beeing impressed. Increase in book value was only partially generated internally through reatained earnings. The other part originates from constant capital increase (delusion of existing shareholders). Shares outstanding has grown by an average of 3,1% p.a in the last 23 years, leaving us with a net increase of 3% p.a (aver.) in BPS in the last 23 years. That is alright, but in the same time span, equity ratio dropped from 41% in 1984 to 19% in 2012. So financial leverage has been rising significantly at Sony. 

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Analysis of Pay-out

 There is nothing really to write home about on Sony's pay out front. Lets keep it simple. Sony does pay a dividend and dividend pay-out has grown by an average of 4,5% p.a. in the 23 years.

 

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 No significant stock repurchase took place in that time span.

 

Conclusion

As suspected at the beginning of this post, I didn't have really fun analysing Sony. I find it rather impossible determining what is going on with this company and can't be bothered to dig any deeper. There are so many great companies out in Japan at the moment. I really don't know why I wasted my time with this one. I reckon it was nostalgia, as I used to love Sony's products and thought it might be also a good business that retained value in its balance sheet over its life span. But even in its heydays (mid 80's and 90's) it seems Sony had been a lousy business for investors. 

One aspect going for the company is, that it looks like the stockprice has fallen enough to give it a nice free cash-flow yield. The other one is that Sony compounded BPS by roughly 4% p.a. over the last 23 years. On the other hand equity ratio detoriated during that period, due to the significant increase in total liabilities

 

The positives migh be enough for a (short-term) speculation on Sony. But I think I stick with Benjamin Graham here, who once said, only a good investment is also a good speculation and rather buy there products than their stock. 

 

Disclosure: No position