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Sony Corp (ADR) Is This Decade’s Underappreciated Turnaround

Josh Enomoto

Among the so-called recovery stories, Sony Corp (ADR) (NYSE:SNE) is one of the more intriguing, and frustrating. Last year, SNE stock turned in a massive performance, delivering 60% returns to long-embattled shareholders. This followed a fairly solid 15% haul in 2016.

Unfortunately, this year’s outing is a different story.

Granted, the once-dominant consumer-electronics giant is still in the black for 2018. Year-to-date, Sony stock is up over 7%. Still, this is a very pedestrian return as we head into the second half of the year. Worse yet, shares have peaked since Feb. 2, when SNE hit nearly $54 on an intraday basis.

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But the biggest concern for Wall Street was the company’s latest earnings report. After putting up exceptional results over the trailing year, the fiscal fourth quarter skidded to a halt. Against an earnings-per-share consensus target of a two-cent loss, actuals came in at a 12-cent loss.

The optics were especially bad because in the year-ago quarter, Sony Corporation produced a 171% earnings surprise. In traders’ minds, the good times were over, and Q4 was the signal to abandon ship. Subsequently, SNE stock fell more than 9% against the prior session.

At the time, I felt that the bearishness was overdone. What people were missing was the very thing that got them interested earlier: the recovery story. On paper, this was the first bump on the road. However, management has been working hard to restructure the company, but this didn’t translate well for Sony stock.

But if the naysayers looked into the details, they’d likely come to the conclusion that giving up is premature. Sony Corporation is finally playing to its strengths, and abandoning things that just don’t work.

This recovery begins at the very top.

Sony Corporation Returning to its Roots

To understand the recovery story for SNE stock, you first must understand the man who engineered it: Kazuo “Kaz” Hirai.

Hirai stepped into the company’s top position in April 2012 at a time when Sony was becoming a Japanese embarrassment. Indeed, the entire nation was suffering from decades of economic stagnation. Coincidentally, as Sony sought a new path forward, Japan itself did the same, electing current Prime Minister Shinzo Abe at the end of that year.

Though the two events are obviously unrelated, the parallels are exceptionally intriguing. Both Hirai and Abe faced daunting challenges; the former to restore pride back to a major corporation, the latter the same for an entire nation.

Moreover, both leaders sought to prove that the “Japanese way” could work. In the early 2000s, Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) shocked its compatriots when a foreigner, Carlos Ghosn, became the automaker’s CEO. Nissan had struggled badly, and faced an existential crisis. Long story short, Ghosn brought excitement to the Nissan brand with sports cars like the 350Z.

Sony wanted a piece of the action, and it too hired a “gaijin.” Media mogul Howard Stringer of CBS Corporation (NYSE:CBS) fame was promoted to the CEO slot in 2005. He promised much, but failed badly, turning into the anti-Ghosn.

Sony Corporation learned that it cannot rely on the patronage of westerners simply because they’re westerners. It’s the same concept with the Abe administration’s foreign policy. He wants Japan to rearm militarily and to take a more assertive role in world affairs. In other words, Abe seeks a platform independent of American (foreign) oversight.

Time will tell whether Abe will be successful. But with Hirai’s tenure at the top complete, we can state that overall, his leadership skills didn’t disappoint.

Hirai Did What’s Necessary, And SNE Stock Benefitted

I spent a considerable time in my career under the Stringer regime. He visited our San Diego headquarters multiple times, perhaps because the weather is unparalleled.

And we could all see what Stringer’s strengths were, even if we didn’t know his resume. He was extremely charming, having an uncanny ability to craft humorous and captivating stories. One could easily be misled into thinking he was a natural-born leader.

Unfortunately, it was all just an act. He shamelessly forecasted greatness to come, and delivered absolutely nothing. Worse, his unqualified minions that occupied high-ranking roles within the company’s vast businesses did the same.

Now to be fair, Sony’s miscues at this time was a two-way street. Stringer strung us along in his dog-and-pony act because the Japanese leadership believed this junk would work and refused to backtrack.

Thus, the consumer-electronics giant had a two-pronged problem. First, the CEO was horrible, and not fit for roles outside of media and marketing. Second, several divisions were failing, and any objective analysis could relay that fact. Yet the company couldn’t change course because doing so would mean admitting these uncomfortable truths.

So we persisted. Looking back, I’m surprised that Sony stock didn’t fall even further into the abyss.

The man who finally had the courage to step up was Hirai. Honestly, it could only be him. Japanese work culture can be a very touchy place. At least Hirai, being Japanese, could gently and politically guide Sony back on track with minimal embarrassment.

Here Come the Chainsaws…

I will concede that cutting your way to profitability is never ideal. Yes, it can generate positive results on paper. However, cut too much and you end up sacrificing the future.

But for Sony Corporation, and SNE stock investors, the time to endure a reality check was long overdue. No longer should employees be subjected to inane conference calls about market-share penetration that was never going to happen. No more endless hours circling around merely to keep up appearances.

Hirai thankfully put a stop to all of it. If a business unit wasn’t generating substantive growth, it was gone. Even if results were solid, but the industry was overly distressed, the division could end up getting axed.

In this endeavor, I argue that Hirai’s biggest accomplishment was he extinguished the sacred cow idea. This was a simple but dramatic paradigm shift from prior Sony mandates. In the Stringer era, management wouldn’t dare think about cutting the TV division because our identity was vested there. Yet every indicator revealed that low-cost leaders like Samsung Electronics was flooding the market with cheaper and cheaper TVs. Ironically, Samsung adopted Sony’s playbook from the 1980s and 1990s.

In a particularly pathetic display, Sony Electronics’ upper management team implored its competitors to adopt “responsible pricing.” Yet when the shoe was on the other foot, Sony wouldn’t budge.

Hirai witnessed these sorry events take place. The difference was that he was in a position to do something about it, and he did. I must stress that this willingness to go against the grain is why Sony stock is where it is.

If Stringer was still calling the shots, the company would cling to failing businesses, destroying itself from within.

Not All Doom and Gloom for Sony Stock

History will remember Hirai for having the audacity to cut unprofitable businesses because let’s face it: that’s the kind of stuff that makes headlines. But what he should also be known for is doubling-down on the company’s strengths.

This might seem like a ridiculously obvious and easy solution, but the reality was more nuanced. For instance, everybody in the organization knew that the PlayStation was keeping the lights on. However, the video-gaming division operated like a separate entity, and internal jealousies arose.

My fellow workers and I often joked that Sony Computer Entertainment (now called Sony Interactive Entertainment) was a CIA front. At the time, it was a mysterious entity whose physical location was discreetly tucked away from common view.

And while jealousies or hard feelings might still exist, Hirai forged ahead. He invested heavily into the PlayStation 4 console, making it the success that we enjoy today. It’s critical to note that Hirai’s efforts are particularly enduring.

In the last fiscal year, PS4 sales hit 19 million units. That’s only a one million unit drop-off against 2016 results. Even with competitors like Microsoft Corporation (NASDAQ:MSFT) and Nintendo Ltd/ADR (OTCMKTS:NTDOY) in the mix, PS4 engagement is incredibly high. Plus, SNE’s console at nearly a five-year run is old, at least by video game standards.

It’s a great feeling knowing that a product introduced in 2013 can still hang with newer rival offerings. Moreover, Hirai proved that SNE can adapt successfully to the consumer-electronic industry’s changing landscape. In this context, giving up on Sony stock is not the smartest decision you can make.

An additional point is that the PS4 facilitated additional revenue opportunities through Sony’s gaming subscription service. Such focus simply didn’t exist in the Stringer era, partly because the company was too bloated.

SNE Stock May Be a Permanently Changed Investment

I’ve spent a considerable amount of time going over the leadership backdrop not because I like history necessarily, but that I want to drive home one message very clearly: the corporate culture and revival that Hirai imparted isn’t going anywhere. I firmly believe that SNE stock is a permanently changed investment.

I’m afraid you’re not going to hear that from analysts who never once worked for the organization like I have. Most analysts deep-dive the numbers every three months, and then compare them to three months prior.

I get it. That’s their job. But as I mentioned in my recently quarterly review, such granular details miss the broader context. Management has made shocking improvements to the point that, if I were to go back, I wouldn’t recognize Sony.

Thus, pounding on SNE stock for a quarterly misstep is like overhauling your sink because a hairball is stuck in the piping. The real issue that investors should focus on is that a rotting house has been fully renovated.

Sony’s new CEO is Kenichiro Yoshida. Formerly Hirai’s right-hand man, Yoshida did much of the necessary dirty work. Contributing for Fortune.com, Bloomberg writes, “Yoshida used the mandate to cut jobs, sell off Sony’s iconic Vaio personal-computer business, spin out its TV set unit and rein in the company’s destructive market share ambitions in smartphones.”

Just like his predecessor, Yoshida possesses sharp discernment. His guiding force is math. If the numbers work, they work. If they don’t, then something has to change, which may include total abandonment.

Please note that Yoshida’s axing Vaio was no small order. In my day, management considered the brand untouchable. Sony-distributed films, such as the 007 series, find ways to sneak in the Vaio.

That said, Yoshida isn’t going to be held hostage to nostalgia.

A Bright Future Under Yoshida

Fortunately for long-term Sony stock investors, the new chief executive’s street cred isn’t just on paper. Yoshida has demonstrated multiple times that he has the same intestinal fortitude that drove Hirai to an unlikely turnaround campaign.

Most notably, Yoshida is very un-Japanese in that he’ll lash out if warranted. Bloomberg writes:

Just a month after becoming CFO, Yoshida criticized predecessors for failing to change Sony as the electronics industry changed. He also began giving forecasts for specific sales and profit targets at individual segments, making businesses that span games, movies, music and devices accountable to investors as well as management.

Again, such willingness to go against the tide isn’t that newsworthy in an American company. But in a Japanese company? At flagship Sony Corporation? In my days, everyone followed protocol and standard operating procedures to a “T.”

When conflict did arise, it was between one product group against another, or one nation against the other. Stated differently, it’s the same tribalism that you see in our current political environment.

And to be as objective as possible, management under Stringer noticed these internal conflicts. We just had an unusual way of dealing with it. I remember being forced to read “The Oz Principle,” a book about accountability. Think Tony Robbins but far less interesting.

Anyways, the book-reading affair was a disaster because we couldn’t talk our sales up. The retail market is not a respecter of feelings or safe spaces.

Yoshida isn’t going to tolerate any of this bovine manure. He’s a 30-plus-year Sony veteran. He knows exactly how this organization ticks, and he’ll do anything to keep it running. From a company that once ran on gimmicks, Yoshida is a breath of fresh air.

Challenges and Opportunities for Sony

As to what we can expect for Sony stock in the future, the underlying company should press forward with the Hirai mandate, so to speak. If it’s not broken, why fix it?

To that end, we’re going to see an unapologetic emphasis on video-gaming innovation. Of course, the PlayStation 5, whenever it’s announced, will generate unbelievable interest.

Here, Yoshida may have some wiggle room to break free from Hirai’s shadow. When the PS3 launched, it had a massive $600 price tag. At the time, it exceeded Microsoft’s Xbox 360 price by a country mile. Yes, the PS3 was a gaming revolution, but it didn’t matter if the target audience couldn’t afford it.

When the PS4 launched, it had a more reasonable $400 price point, and it was in line with the competition. The rumor is that Sony will keep that price tag to avoid the PS3’s mistake. However, the gaming sector has changed dramatically since the PS3 launched. Nowadays, gamers are willing to drop serious coin on the best rigs.

It’s a risk, but now is the perfect time to launch a $600 console, or perhaps even higher. With the PS5, Sony has the opportunity to create the definitive gaming platform. Better yet, the target demographic is able and willing to fork over the cash.

At the same time, Sony can’t go overboard. Like printers, the money isn’t in the device; it’s in the ink that customers must constantly buy. Thus, management must produce something that’s simultaneously captivating but reasonably attainable. Otherwise, it could unnecessarily jeopardize individual video-game sales.

Sony Pictures Is a Surprising Bright Spot

In the era of cord-cutting and streaming entertainment, the box office has suffered steep losses. The problem goes well beyond Sony.

I love watching movies on the big screen, so I’m still one of the few that attend. But lately, I’ve noticed that prior to select movies starting, their producers and lead actors break the fourth wall by thanking the audience for showing up. It’s strange, awkward and desperate.

So it’s surprising that Sony Pictures is actually a big plus for SNE stock. In the last fiscal year, its film division accounted for nearly 12% of total corporate revenues. Against the company’s other businesses, Pictures ranks fourth.

What’s going on? In a recent write-up about Hollywood, I stated that movie studios are focusing less on the art, and more about what brings people to the cinemas. This is why Walt Disney Co (NYSE:DIS) was so eager to pick up the “Star Wars” franchise. Lions Gate Entertainment Corp. (USA) (NYSE:LGF.A, NYSE:LGF.B) and its stream of artistically edgy films? Not so much.

Sony, of course, has several franchises under its belt that it will exploit to no end. But one surprising catalyst is Affirm Films, its faith-based production division.

Christian movies are no longer about Kirk Cameron and his Bible-thumping overtures. Instead, they’re now exceptionally well-crafted works of cinematic art featuring respected, mainstream actors. During the Easter holiday, I watched “Paul, Apostle of Christ.” In my opinion, it was one of the finest films I’ve ever seen.

Here’s the kicker: Christian movies, while not necessarily popular, are usually profitable against their production budget.

Currently, faith-based films’ revenue haul is peanuts, so I don’t expect a big boost towards SNE stock. However, Sony can carve out a burgeoning niche market that could pull a few surprises.

What Legacy Will Yoshida Leave?

Howard Stringer is the man who brought Sony to the brink of destruction. On the other hand, I am forever grateful to Kaz Hirai for resurrecting Sony stock when all seemed lost. But what kind of legacy will Kenichiro Yoshida leave behind?

The challenge that Yoshida faces is that the “low-hanging fruit,” if I can even call it that, is gone. In other words, for Yoshida to be truly remembered, he must deliver a compelling innovation.

Don’t get me wrong: if the new chief executive rides the boat that Hirai built, he’ll have a solid run. The beautiful thing is that Hirai has structured the company for competitiveness in today’s consumer-electronic industry. Sony doesn’t need much more improvements and “efficiency initiatives.”

But what SNE stock could use is a “Morita moment.” Entrepreneur Akio Morita is famous for two things: co-founding Sony Corporation and giving the world the Walkman.

Of course, this is a tall order. The Walkman was to the 1980s and early 1990s what Apple Inc.’s (NASDAQ:AAPL) iPhone is today. What Sony has desperately missed is a flagship product that it can call its own. Even PlayStation is a souped-up Nintendo console.

Again, this might be asking too much. But if there was ever a time to produce something groundbreaking, now would be it. Smartphones are exciting but they’re a dime a dozen. Wearable devices are also cool, but are rapidly losing their freshness.

If Sony could fill that void like the Walkman once did, it could catapult SNE stock to new heights. But that’s a development that we’ll just have to wait upon.

Final Thoughts on Sony stock

As the kids like to say, I’ve “HODL”-ed Sony stock for several years. Barring any catastrophic developments, I’ll continue to stay the course.

Missing from the recent earnings-inspired selloff was that SNE engineered a remarkable recovery. When Hirai took over the helm, his company was on life support. Worse, in its bid to be everything, it became nothing.

With Hirai’s disciplined stewardship, Sony has direction and a sense of purpose. Thus, I’m not inclined to follow everybody out the exits. Quite the opposite — I believe this is where the good stuff truly begins!

Yes, I’m optimistic because I own SNE stock. But more so than my own emotions, I’m finally seeing what Sony should have been while I was there: a leaner, focused entity that got down to the brass tacks, and didn’t involve itself in failing enterprises.

It took a long time for the organization to learn its lessons. Now that it did, giving up seems not only illogical, but a grievous waste.

As of this writing, Josh Enomoto is long SNE.

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