Recent article in Barron's from Nov. 16:
Q: Sony Corp., recently Y9,670 a share, is one of the best-known Japanese companies. It's globally competitive, with a fine product line, and is heavily owned by foreigners. How do you all rate it?
Merner: Sony just reported excellent interim earnings. Some brokers have buys, sells and holds on it.
Q: That covers the waterfront.
Merner: But some investors have only buys and sells.
Q: What's the point here?
Merner: Sony is doing well, everybody knows that, but the good news already has been pretty well discounted in the stock price. It isn't cheap. I want to buy stocks that are cheaper than Sony, where my downside risk is low.
Q: Kathy, what do you think?
Matsui: We still like the company, but its earnings momentum is likely to slow from what we've seen in the last two or three quarters. We think Sony is still very reasonably valued with a P/E ratio in the low 20s. As a play on Japanese digital technology -- audio, visual and computer -- it's by far the most advanced and sophisticated company in the world in this field.
Now, would I buy Sony today over other Japanese companies? I prefer the stocks that I mentioned earlier.
Merner: Will Sony's results surprise investors on the upside over the next couple of years? Probably not. If the yen were to strengthen against the dollar, Sony could surprise on the downside.
Kinmont: It's still too soon to be looking at these "nifty" stocks. There are a number of overlapping issues here. The first is whether we should rely too heavily on P/E ratios when earnings visibility is becoming poorer.
Second, does Sony, as an enterprise, deserve the high-quality rating it's been accorded? You must divide its investor base into two groups. One camp has rational expectations about Sony's management and sees it as a Japanese company that's in the right place at the right time and has earned exceptional profits, in part from the yen's depreciation.
Unfortunately, there's a valuation premium in the stock that hasn't yet been fully squeezed out. Built into this valuation is a belief that management has got the religion of shareholder value and isn't destroying this value. I think this isn't sustainable. Over the past couple of years, Sony has increased its advertising expenditure by about Y90 billion [$750 million], has ramped up its research-and-development budget again and is wasting just as much money as any other Japanese company.
Thirdly, we must be very careful of stocks that have become representative of certain conditions in the market, namely a focus on a few "nifty" names. These stocks tend to go up too far and, when market conditions change, fall further than ordinary stocks. Sony is very much a candidate for this sort of treatment.
It's interesting to draw a parallel between Sony's stock price movement over the past few years and its action in the pre-bubble period. Sony doubled from 1978 to 1981, then halved from summer 1981 to summer 1982. It failed to top its 1981 high until the late-'Eighties bubble market came along and a rising tide floated all boats.
You must be very confident that you're buying actual earnings and not just dreams. I don't think the market is confident of Sony's earnings outlook at the moment. A prolonged period of correction may be necessary to take back unwarranted assumptions tied to the stock.
Q: Whew! Where would you buy Sony?
Kinmont: From Y6,040 a share in March 1996, the stock hit Y12,600 in August 1997. In my personal view, and I stress that, Y7,500-Y8,000 would be a good buy point. |
