Is Sony a forgotten gem?
Opdateret: aug. 22
Sony has been part of my portfolio for quite some time. Once they published their earnings from October to December 2020, I previously called them a undervalued company. In this analysis, I will investigate if my claims were right.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
You ought to know that I have Sony in my portfolio, and I have often called it undervalued. However, it will not affect this analysis, as I always keep my analyses objective, as numbers will pretty much always be objective. Another thing you should know is that Sony is a Japanese company, meaning that they publish their results in the Japanese Yen. At eToro you have access to the stock that is listed in the U.S. meaning that I have converted Yen into U.S Dollars with today's rate (13th of February 2021).
Sony is a Japanese multinational conglomerate. It is one of the largest manufactures of electronic products, the largest video game console company and the second largest video game publisher. They also have 50 % market share in the image sensor market, is among the semiconductor sales leaders and one of the largest television manufacturer in world. They are also one of the largest record companies and one of the most comprehensive media companies. Hence, Sony has a lot of operations in many different sectors. Sony definitely has a strong brand moat, as their brand is well-known around the world. If you look strictly at the video game console sector, you could argue that they also have a switching moat, as people would probably stay with the Playstation instead of switching to Xbox.
Their CEO is Kenichiro Yoshida. He first joined Sony in 1983, and has held various positions until he became the CEO in 2018. Previous to him becoming CEO, he was Sony's CFO, where he helped the company to achieve record profits by slashing jobs and selling or spinning off money-losing units. Since he has become the CEO, he has acquired the production companies Silvergate and Eleven, purchased EMI Music Publishing and taken financial stakes in Bilibili (4,98% ownership) and Epic Games (1,4% ownership). He is often described as cool and a pragmatic decision maker, with plenty of experience from the venture capital game. He is often credited that Sony has regained their momentum under his leadership. It is hard to find much information about Kenichiro Yoshida but looking at the results of Sony since he has taken over, there are no doubt that he has done a great job.
We have determined that Sony has a large brand moat, and maybe a small switching moat. We like the management as well. Now let us look into the big five numbers in order to see, if Sony does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. Sony's oldest numbers are a bit underwhelming but the newest numbers all live up to the requirements, meaning that the oldest numbers wouldn't scare me from investing in Sony.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The numbers are very underwhelming. They do not live up to any of the requirements in any of the benchmarks. While the Sales Growth Rate is not the most important of the growth rates, it is still slightly concerning.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Excluding the last benchmark, the numbers are fantastic. Obviously, the latest benchmark is something that needs to be monitored but one number in one benchmark shouldn't scare you away from investing in a company. Especially not one that shows such great results in all of the other benchmarks.
The Equity Growth Rate is the most important of all of the growth rates, as it shows what the company would have left if they sold everything, paid of all debt and took the money that is left. Looking at Sony the number, the newest benchmarks all look great. Hence, it doesn't concern me that the oldest benchmark is underwhelming.
Finally we look into the Cash Growth Rates. All but one benchmark live up to the requirements. And as we saw in the Equity Growth Rate, it is the oldest benchmark that is underwhelming. As all of the other benchmarks does live up to the requirement I see no reason for concern.
Just to shortly summarize the five numbers. You can bundle the ROIC, Equity Growth Rate and Cash Growth Rate together, as they all show underwhelming results in the oldest benchmarks, while good results in the newest benchmark. As we see this tendency in both the ROIC (the most important number) and the Equity Growth Rate (the most important growth rate), I believe that Sony has certainly changed into the better lately. Sure, the Sales Growth Rate is somewhat of a concern, while the EPS Growth Rate is nothing to be concerned about, as we only see a bad number in one benchmark. Once you combine all of the numbers together, I would certainly feel comfortable to invest in Sony at the right price.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Sony, I can see that Sony has 1,09 years earnings in debt, which is great.
Based on my findings so far, it is pretty obvious that Sony is a good company. However, no investments are without risk and Sony do have a some risks as well. One way to look into risk factors is to read the company's latest annual report. One of the risk factors they mention is that competition could lead to lower revenue or operating margins, which Sony believes is one of the larger risks. They operate in different industries, and could face competition from companies that only operates in one industry, which means that the competitor could be highly specialized in that one industry. Another risk is the same risk that many other companies face, as they continuously needs develop new products in order to stay competitive and stimulate customer demand. While they mention other risks in their annual report as well, I thought that these risks are the most important, and needs to be monitored.
The potential for Sony is obviously great within some of the industries they operate it. Mordor Intelligence forecasts the global gaming industry to have a compound annual growth rate of 9,17 % until 2025. While the image sensor market is expected to have a compound annual growth rate of 8,4 % until 2026 according to Fortune Business Insights. And these are only some of the industries that they operate in.
All right, we have gone through the numbers, potential and risk regarding Sony, and now it is time for us to calculate a price for Sony. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS as it is now at 5. I chose a Estimated future EPS growth rate of 6.40 (which is the consensus analyst growth rate), Estimated future PE 12,80 (which the double of the growth rate, as the historically PE for Sony has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $29,42, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Sony at price of $14,71 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions and in Japanese Yen. The operating Cash Flow last year was 1.349.745. The Capital Expenditures was 513.100. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 359.170 in our further calculations. The Tax Provision was 177.190. We have 1.240 outstanding shares. Hence, the calculation will be like this: (1.349.745 - 359.170 + 177.190) / 1.240 x 10 = 9.417 (Converted into USD) $89,73 in TEN CAP price.
The last calculation is the PAYBACK time. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 1.055,75 JPY (10,06 USD) and a growth rate of 6,40 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $107,47.
I do believe that Sony is a great company with a good management. While some of the numbers are a bit underwhelming, I still believe that if you look at the numbers overall, it is certainly a company that you would be comfortable investing in. I think they have quite a large moat, even though you still have to watch for competitors in some of the industries they operate in. There are quite a big difference in the calculations of the buy price but if you can get Sony at $89,73 you will get under the TEN CAP and PAYBACK price, and I would be very happy about that.
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