Business Insight Zone

Whither the venerable electronics maker? Let’s read along from the Martin Fackler’s New York Times together, eh?

Sony’s Quarterly Profit Falls by 72 Percent

Well, that can’t be good.

TOKYO — Sony reported a 72 percent drop in profit in the most recent quarter on Wednesday, hurt by a stronger yen and the global slowdown. . . .

Sony has joined a procession of Asian exporters reporting lower earnings . . . They have blamed drops in global and particularly American demand, contradicting the once popular notion that Asian economies were decoupling from the United States. . . .

More and more I see analyses that emphasize this point about the interconnection of economies. For many years we’ve slung around the term “globalization” as though it were a new phenomenon, instead of something going back at least as far as Vasco da Gama. And previous slumps — whether we’re talking about the Great Depression of the 1930s or the Asian financial crisis of 10 years ago — have spread their woes across many countries.

What’s different now is the velocity of that spread. The deep integration of the industrial and consumer economies of the world’s more-developed nations, along with the immense size and speed of global capital flows, takes old problems like trade or currency imbalances and magnifies them in a gigantic 24/7 financial echo chamber.

Or, for short: when U.S. consumers stop spending money, trouble ensues.

Tie all of this up with the age-old problem of investor irrationality, and the results can turn absurd:

Many analysts say share prices of top Japanese companies have fallen so far as to defy reason. Not only Sony but many of Japan’s best-known brand names — including Toyota, Panasonic and Bridgestone — have seen their market value drop below their so-called book value, the total worth of their buildings, equipment and other physical assets.

As of Tuesday, Sony’s market value was $21.4 billion, or about 0.58 percent of its book value, according to Paul Migliorato, head of research at NamiNori, a Honolulu-based equity research firm. . . .

“The market is treating Sony and Toyota like pariahs,” Mr. Migliorato said. “Any sense of reality has been hijacked by momentum and fear.”

Two points come to mind here:

1. Sony actually had a very nice run before this, after a few years of bumpy road. For its last fiscal year, which ended in March 2008, Sony increased revenue by 27% and net income by 347%, nearly tripling its profit margin along the way. It has even boosted sales of the PlayStation 3 video game system — though not enough to catch Nintendo’s Wii — and enjoyed more hit movies from its entertainment division. (Last year, Sony’s savior was Spider-Man 3; this year, that role is being played by Will Smith’s Hancock.)

2. “Be fearful when others are greedy and greedy when others are fearful.” Looking at the abyssal share prices of Sony et al., the wisdom in Warren Buffett’s motto becomes clearer than ever. One of Buffett’s signature practices is never to buy an asset that he can’t get at a bargain price, and one of the things he observes closely is the relationship of a company’s price to its book value. Buffett distinguishes himself from many other financiers by his careful attention to the potential downsides of investments; buying a company at less than book value — especially if you think the company is basically well-run and you expect to hold the investment for some time — is a good way to insulate yourself from losses. One wonders whether Buffett is shopping among Japanese blue chips for bargains.

Sir Howard Stringer took the CEO job at Sony a few years ago with much fanfare: savvy Brit with strong American ties takes the helm at Japanese icon, and all that. When you look at the top- and bottom-line results from last year, you can hardly fault his management. But when you look at the results he just handed in, it’s clear that he’s got his work cut out for him.

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Related links:

• Sony management deserves no pity.
• The Nintendo Wii: Hitting its way into the Hall of Fame.
• Company of the Day (09/18/07): Sony.

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Category: Consumer goods, Entertainment, Technology