March 27, 2008 At $41, Sony (SNE) is good value in relation to its competitors in the Audio-and-Video-Equipment Industry. It is also reasonable in relation to its own trading history.
Sales and Earnings Sony's trailing price/earnings ratio is 15.9 and the forward p/e is ratio is estimated to be about 13. These ratios indicate that Sony is reasonably valued. Also, the high sales in relation to the share price leaves a lot of potential to increase profits with reasonable margins. Sony's price/sales ratio is 0.47, compared to the industry average of 2.07. The industry average price/earnings ratio is 24.4.
Sony's price/book ratio is 1.15, compared to the industry average of 4.78.
Contrarian Considerations Priced in terms of its own trading history (if we assume the average of the highs and lows to be a reasonable valuation of its stock) then we can calculate a reasonable valuation to be:
($125 + $25)/2 = $75
This means that, at $41, Sony is trading at a 45% discount to its "average' price over the last 10 years.
Whatever valuation you choose, Sony is good value at $41.
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We believe Sony will continue to struggle as it faces increasing competition from innovative digital products and increasing competition from low-cost Asian manufacturers as the consumer market slows. Although Sony reported strong Q3 results, it has lowered expectations for Q4. We would be hesitant to own shares of a consumer focused company, and maintain a Sell recommendation on SNE shares, lowering our price target to $36.50.