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Why Streamlining and Positive Trends Make Sony a Buy

Zacks

Undoubtedly, fiscal 2016 has been rough for Japan-based multinational conglomerate, Sony Corporation SNE, which saw most of its profits being wiped off due to the Kumamoto earthquakes. Since then, Sony has made a series of concerted efforts to turn its fortunes around. Steady growth drivers, positive industry trends and impressive valuation make us believe that the stock has room for further upside.

Encouragingly, the company started fiscal 2017 on a decent note, having gained 26.2% year to date, outperforming the Zacks categorized Audio/Video Home Products industry’s average gain of 23.1%.

Read on to find out the key factors which make this Zacks Rank #2 (Buy) company an attractive proposition for investors right now.


Streamlining Efforts

In the past two years, Sony has made a series of concerted efforts to attain a leaner organizational structure, in a bid to augment growth. The company believes that converting its business units into distinct subsidiaries will enhance its organizational independence, as each independent unit sets high targets in an effort to accomplish the company’s mid-term targets.

The company has undertaken a number of measures in its Branded Product Business, which includes Mobile Communications, Imaging Product & Solutions, and Home Entertainment & Sound segments, to ensure stronger growth. On account of these initiatives, the company recorded an operating profit for all the six Electronics segments during the fourth quarter of fiscal 2016.

These steps are helping the company generate sustainable profit, accelerate decision-making processes and reinforce business competitiveness, which augurs well for future growth.

Key Business Strengths

Sony’s Game & Network Services business, which accounts for the company’s service-related revenues, has lately proved to be one of the strongest growth drivers. Particularly, sales of PS4, the latest generation gaming console, have outnumbered all its previous versions, thus adding to Sony’s bliss.

PS4 Pro, the upgraded version of PS4 gaming console and virtual reality (‘VR’) system, both of which were launched last year, are expected to act as the Gaming division’s key profit churners. Also, it has plans to roll out some major software titles to boost sales, moving ahead.

Apart from gaming, modest recovery in smartphone unit sales and increase in media networks and television productions bode well for growth of Mobile Communications and Pictures Business, respectively. Overall, Sony expects total sales to be around 8,000, up 5.2% from fiscal 2016 and operating income to be around ¥500 billion, a 73.2% increase from fiscal 2016.

Sony remains confident that it will be able to achieve the targets of its mid-range plan set in Feb 2015, where it expects operating income to go beyond ¥500 billion and 10% or higher ROE.

Estimate Revisions & Valuation

Sony also has a Zacks VGM score of ‘A’. The VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. A good VGM score indicates stronger chances of success. Our research shows that stocks with Style Scores of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 (Strong Buy) or #2, offer the best upside potential.

Analysts have become increasingly bullish on the company over the past month, as the Zacks Consensus Estimate for fiscal 2017 earnings trended up over the same time frame, from $2.20 to $2.24 on the back of one upward estimate revision versus none lower.

Other Stocks to Consider

Other similarly-ranked stocks in the same space include Pool Corporation POOL, H&R Block, Inc. HRB and Nintendo Co., Ltd. NTDOY. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pool Corporation has a positive earnings surprise of 7.6%, beating estimates all through over the trailing four quarters.

Nintendo has a positive earnings surprise of 40.0%, with two beats for as many misses over the trailing four quarters.

With three beats in the trailing four quarters, H&R Block has a positive average surprise of 7.7%.

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With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

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