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Sony (SNE) a Great Value Stock on Multiple Growth Catalysts

Zacks

One high-growth tech stock that is still thriving under the radar and should be in investors’ spotlight is Sony Corporation SNE — the Japanese gaming giant. Sony’s shares have appreciated 29.5% over the past six months, as it enjoys solid momentum in games, music, and home entertainment — which happens to be its highest-margin segments. This compares well with the industry’s rally of 18.7%.

Despite such impressive price momentum, the company’s trailing-twelve-month price to earnings ratio stands at 14.1, lower than S&P 500 index’s PE multiple of 21.4. The stock is also trading at a discount relative to its industry, which indicates that the stock is undervalued compared with its peers.

The discounted valuation combined with the growth catalysts make this Zacks Rank #1 (Strong Buy) company an attractive pick right now. Let’s discuss some of these growth drivers.


Growth Catalysts

Sony is perhaps best known for its PlayStation gaming console, televisions and headphones. In gaming, the company has reportedly sold more than 75 million PlayStation 4 consoles since the launch of the line four years ago. The figure is almost double the estimated unit sales of Microsoft Corporation’s MSFT Xbox One consoles and quadruple of Nintendo Co.'s NTDOY Wii U console. PS4 clearly emerges as the leader in the current generation of video game consoles and continues to be the best-selling gaming hardware.

Console sales generate additional revenues from game downloads and subscription fees for online gaming. In the recent fiscal third-quarter results, Sony’s Game & Network Services (GN&S) segment climbed an impressive 16.2% year over year. Burgeoning demand for next-generation video game consoles, explosion in eSports and the massive digital shift in the video game industry are tailwinds for the segment. Further, augmented and virtual reality might prove to be catalysts for Sony’s gaming business.

The company’s Music segment also witnessed a 22.4% surge in sales on a year-over-year basis, benefiting from elevated Visual Media and Platform sales and driven by “Fate/Grand Order” application. In addition, Recorded Music sales improved on the back of a steady rise in digital streaming revenues. Sony's TV business is set to benefit from an industry upswing as more and more consumers upgrade to OLED and 4K screens.

Home Entertainment & Sound segment was another strong growth driver for the company, with sales in the segment jumping nearly 22% on the back of improvement in product mix of televisions. This indicates a shift to high value-added models.

Semiconductors are also riding high on demand for camera chips for smartphones, including Apple’s iPhone. Semiconductors carry robust margins and expanding image sensors demand for mobile products should boost its growth prospects.

Sony managed to chart positive growth across its operating segments in the fiscal third quarter. All in all, we can see that Sony’s high-margin segments are accelerating at a swift pace, which implies healthy earnings growth over the coming years.

Recent Projections

Sony expects to sustain the momentum in Music and Home entertainment businesses. Overall, the GN&S segment is likely to benefit from an expected increase in PS4 hardware and network sales. Sony's VR products are set to capitalize on its existing base of more than 75 million PS4 users.

Music sales are projected to be driven by higher-than-expected Visual Media and Platform sales, as well as Recorded Music sales. Image sensor unit sales for mobile products are likely to drive Semiconductors sales higher, while an expected increase in television unit sales will drive HE&S revenues.

Summing Up

Sony has really been firing on all cylinders to boost profits and the results are slowly beginning to manifest themselves in better operating income and margin performance. The company has created an impressive ecosystem of the PlayStation family. The company’s restructuring efforts and streamlined operations will help generate sustainable profit in the coming quarters, thus propelling future growth.

Clearly, Sony has its fingers in several pies and there are high chances that the company will soon become a tech powerhouse, in multiple industries.

The industry trends are in Sony’s favor as well. The rise of autonomous cars and factory robots can help its semiconductors business move beyond smartphones. In gaming, soaring software and service revenues can extend the PlayStation 4 up-cycle and smoothen profits between new hardware launches. In fact, we believe that secular trends might make Sony a solid long-term growth story.

The company’s quarterly numbers have also been surpassing estimates, while future projections are climbing higher. Sony has scored consecutive earnings beats over the trailing four quarters, with an average positive surprise of 79.8%.

Sony Corp Ord Price, Consensus and EPS Surprise

Further, analysts have also revised the company’s estimates higher in recent times. The Zacks Consensus Estimate for fiscal 2018 has gone up from $2.89 recorded a couple of months back to $3.86 today — a move of 33.6%. This indicates that analysts are feeling bullish about the stock.

We believe that this would be a great time for investors to consider this stock for their portfolio, considering the discounted valuation and strong growth catalysts.

Another stock worth a look is Snap-On Incorporated SNA, which carries a Zacks Rank #2 (Buy). Snap-On has an average positive surprise of 1.5% in the trailing four quarters, beating estimates all through. You can see the complete list of today’s Zacks #1 Rank stocks here.

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