Sony’s stumble

Sony took a beating overnight in Tokyo and its U.S.-listed shares are reflecting that today, down about 4% on disappointment with the company’s latest earnings report.

I could be wrong on this, but I still believe very strongly in the Sony turnaround story. It will not be easy, though, and it will take some time.

In some ways, it reminds me of Apple in the mid 1990s. Before anyone panics, let’s be clear on something: I am not saying Sony will be another Apple. All I’m saying is that Apple is a relevant lesson in how dramatically fortunes can change in a turnaround situation when given enough time to play out.

When Steve Jobs returned to Apple, there was a surge of optimism about the company’s future. But there was still a lot of uncertainty too, and the fears were even greater than in Sony’s case. People weren’t just worried about whether or not some product was going to come out a little later than planned, they were worried about Apple’s survival as a company.

Nearly 10 years later, Apple’s transformation looks effortless in hindsight thanks to a little device called the iPod. And all it does is play music through a pair of headphones, just like the Walkman did in 1979.

Sony CEO Howard Stringer is no Steve Jobs, and who knows if Sony will score with a blockbuster product like the iPod. But who’s to say they won’t? Does anyone know what the big thing in consumer electronics will be in 2016? I certainly don’t, but I’m willing to bet that sometime between now and then, Sony is going to come up with at least a couple big winners that we’re not even thinking of right now.

Meantime, Sony has gone from nowhere in televisions to leader of the pack with its flat-panel Bravia line. The PlayStation 3 may be late, but it’s still coming and I’m sure it will be a good product. The delay doesn’t give Microsoft a “head start”. All it’s going to do is make their Xbox 360 seem older when the PS3 comes out and Nintendo just shot itself in the foot by renaming its new console “Wii”. Smart.

Critics like to point to Sony’s valuation as a concern. At 48 times earnings, it looks expensive, they say. Feel free to disagree with me on Sony’s prospects, but please get a better argument than this.

The p/e is 48 because the “e” is depressed and won’t reflect the company’s true potential until further restructuring is complete–and there is much more work left to be done. Sony’s return on equity, for example, is only 4% versus 20%+ at Apple. Sony can’t close that gap overnight, but it can easily do better than 4%.

Anyhow, the multiple should be high because of Japan’s interest rate environment. Valuation multiples mean absolutely nothing without looking at rates. This an extremely important concept for borderless investors to understand when comparing stocks from different countries.

With rates at zero to 1%, a p/e of 48 is not as expensive as it sounds. Sony at 48 times depressed earnings is actually cheaper than Apple at 35 times peak earnings in a much higher rate environment.