The near term looks grim for Sony, yet things may be even worse than the electronics and entertainment giant is letting on.
After slashing its earnings forecast, the Japanese firm's outlook is bleak. Its new profit guidance, however, may not fully account for a further surge in the yen, Japanese equities continuing to tumble and weaknesses in Sony's core product lines. Plus, the slide in the won has given Sony's South Korean competitors an added edge.
On Thursday, Sony (nyse: SNE - news - people ) slashed its 2008 net profit outlook by 38%, to 150 billion yen ($1.5 billion), from its July forecast. The company said the most significant setback was higher than expected foreign exchange losses. The stronger yen, which went below the 100 mark against the dollar earlier this month, has dealt a blow to manufacturers, making exports more expensive. The company also cited a steeper global downturn, which is likely to pummel its LCD TV and digital camera businesses. To top it off, Sony expects to lose more on its equity investments thanks to the massive slide in Tokyo's stock market, which gained momentum this week.
But Sony's prospects are likely to be worse still. The company warned that "market fluctuations could further negatively impact the revised forecast" because the company stopped accounting for the slide in Japanese stocks after Oct. 1. Its guidance also included a one-time boost of 10 billion yen ($102.4 million), owing to an acquisition.
"This is just the beginning of a big earnings collapse," said a Tokyo-based analyst who asked to remain unidentified because of company policy. "Given the track record of this company, it will under-deliver all the way." He added that there is a "good chance" Sony will post a loss this year.
South Korean rivals Samsung Electronics (other-otc: SSNLF - news - people ) and LG Electronics (other-otc: LGEAF - news - people ) will get a boost from this year's 31.0% slide in the won, which makes South Korean exports relatively cheaper. Sony has the highest foreign exchange sensitivity of the three electronics giants and big exposure to the slumping U.S. and European markets.
Until its recent bounce back, a softer yen had hid serious weaknesses in Sony's core businesses for some time, CLSA analyst Atul Goyal wrote in an Oct. 21 research note. Sony will make further losses in televisions, videogaming and mobile phones (see "Sony Immobilized By Mobile Phones"), despite early 2008 promises of profits in TVs and its PlayStation3 videogame console. Its profits from digital cameras and Vaio computers will shrink considerably, owing to downward price pressures, he added.
"Even the slightest decrease in demand will trigger a massive price war. We're seeing the beginning of that price war. It will last much longer" with the global downturn, said the Tokyo analyst.
Sony's profit for the fiscal second quarter, ended Sept. 30, nearly halved from a year earlier, to 73.7 billion yen ($754.9 million). Taking into consideration a one-time gain of 60.7 billion yen ($621.8 million) from a property sale, Sony did much worse.
Before the earnings announcement, Sony shares closed 155 yen ($1.59), or 6.3%, lower, at 2,295 yen ($23.51), in Tokyo trading.
Source : http://www.forbes.com/
