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Sony’s Winning Streak Continues with a Solid Second Quarter

Leo Sun, The Motley Fool

Shares of Sony (NYSE: SNE) recently jumped after the Japanese conglomerate posted strong second quarter numbers and raised its full year forecast. Its revenue rose 6% annually to 2.18 trillion yen ($19.6 billion), its operating income climbed 17% to 239.5 trillion yen ($2.2 billion), and its net income grew 32% to 173 billion yen ($1.6 billion).

For the full year, Sony expects its revenue to rise 1%, its operating income to grow 30%, and its net income to improve 41%. Those figures were much higher than its forecast during the first quarter, which expected less than 1% sales growth, a 9% drop in operating income, and just 2% growth in net income.

Sony's display at IFA 2018.

Image source: Sony.

Let's dig deeper into Sony's earnings report to see if investors should still buy this stock following its 25% rally over the past 12 months.

Identifying Sony's stronger businesses

Sony's top line growth was supported by four businesses during the quarter: Game & Network Services (G&NS), Imaging Products & Solutions (IP&S), Semiconductors, and Financial Services.

Unit

YOY revenue growth

YOY operating income growth

G&NS

27%

65%

Semiconductors

11%

(3%)

IP&S

5%

0%

Financial Services

27%

7%

Source: Sony Q1 earnings report.

Out of these four businesses, the G&NS unit matters the most since it generated 25% of Sony's sales and 38% of its operating income. Sony mainly attributed that growth to stronger software sales, especially on PS Plus.

However, Sony's gaming unit notably grew at a slower pace than Microsoft's (NASDAQ: MSFT) gaming unit, which posted 44% annual growth last quarter on robust software and hardware sales. Yet Sony remains the king of the console market -- the company has sold 84 million PS4s worldwide compared to 39 million Xbox ones, according to Vgchartz.

The Semiconductors unit, which generated 12% of Sony's sales and 20% of its operating income, posted top line growth on higher sales of image sensors for mobile devices, but struggled against the same headwinds -- higher capex and lower margins -- that are hurting chipmakers worldwide.

The IP&S segment, which accounted for 8% of Sony's sales and 9% of its operating income, attributed its slight growth to higher sales of value-added products (like interchangeable lenses and mirrorless cameras) offsetting lower sales of digital cameras.

A Sony digital camera.

Image source: Getty Images.

The Financial Services unit, which accounted for 16% of both Sony's sales and operating income, benefited from improvements in its investments and higher policies at its life insurance unit, Sony Life.

Identifying the weaker businesses

Meanwhile, Sony's Music, Pictures, Home Entertainment & Sound (HE&S), and Mobile Communications (MC) businesses all posted weaker revenue growth during the quarter.

Unit

YOY revenue growth

YOY operating income growth

Music

(1%)

(3%)

Pictures

(1%)

205%

HE&S

(9%)

0%

MC

(32%)

N/A (operating loss)

Source: Sony Q1 earnings report.

The Music unit, which accounted for 9% of Sony's sales and 13% of its operating income, benefited from higher demand for streaming services and the sale of its stake in Spotify. However, a shift to a new accounting standard throttled its year-over-year growth on a reported basis. Looking ahead, Sony's full takeover of EMI Music should strengthen the unit.

The Pictures segment, which generated 11% of Sony's sales and 10% of its operating income, saw softer film revenue offset higher revenue from its TV and media networks business. The unit's big jump in operating profits was mostly attributed to its shift to a new accounting standard.

The HE&S unit, which generated 13% of Sony's sales and 10% of its operating income, struggled with weak demand for its TVs. The MC unit, which generated 5% of Sony's sales but posted an operating loss, failed to gain much ground in the crowded Android market and faced declining smartphone sales in Europe.

So is Sony worth buying?

Sony has a complex business, but the company is mainly raising its full-year forecasts on two tailwinds: the strength of its gaming business and its consolidation of EMI Music. Sony's forward P/E of 13 looks cheap relative to its earnings growth potential, and it pays a forward dividend yield of 0.5%. Sony still faces some tough headwinds -- especially in the saturated TV and smartphone markets -- but I think its strengths will offset its weaknesses for the foreseeable future.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.