Struggling Japanese Tech Stocks: An Opportunity For Investors?

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There are several tech companies suffering in Japan which currently trade at low valuations. This seems to be a secular change on par with the challenges that U.S. automakers faced in the past two decades. Are the valuations of these companies low enough to compensate investors for the risks these firms face?

Panasonic rating cut

Panasonic (NASDAQOTH: PCRFY) is in the news as Moody’s investor service, a credit rating company, cut its long-term credit rating to one level above junk, a rating of Baa3. Panasonic, which is one of the Japan’s biggest electronics maker fell 3.8 percent on the news. The company has fallen 38 percent this year. Moody’s said, “Panasonic may need to undertake additional restructuring measures and challenging market conditions will continue to hinder the timely recovery of Panasonic’s financial profile.”

The company made a second straight annual loss, inspiring analysts to question whether Panasonic can face the tough market facing Japanese electronics suppliers. Many analysts suggest that the company needs to close its unprofitable units to cover its losses. Another important factor in Moody’s downgrade is the rise in Panasonic’s debt levels. The company’s net debt rose to around $13 billion, which was around $9 billion a year ago. On the other hand, in the corporate bond market, borrowing costs have risen. Adding to its woes, the guidance that the company has laid out was fearsome. The company forecasts a $9.3 billion loss in this fiscal year ending March 2013. The company may be forced to tap the debt markets in the near future and accept higher interest rates based on its lowered bond rating.

Sony Strategy Changes

Sony (NYSE: SNE) has suffered declining sales. Sony lowered its annual TV sales target, from 17.5 million to 15.5 million televisions. All in all, Sony has lost about $8.5 billion since early 2004.

Sony is looking to dispose of its chemical products division and other non-core businesses in order to raise cash. It is also taking on a $640 million investment in Olympus. These changes are part of a reorganization of firm, which will require finesse against fierce competition from LG Electronics and Samsung (SSNLF).

Sony’s CEO hopes its television division can help drive a turnaround. Sony will prune its list of fewer television models and spotlight the new 84-inch Sony Bravia, which will soon retail near $21,500 in Japan. (I want to point out that number is the dollar equivalent price, not the Yen price!) The new Bravia will display images with more definition than current high definition TV models. Sony is hopeful that large, high-resolution TV sets will be in much great demand in overseas markets.

Problems for Sharp

Sony’s problems are small when compared to many other Japanese companies. The company lost over $1.25 billion from their first half of 2012 operations. The decline of the electronics industry is likely to have negative consequences to the economy. President of Facoku Capital Markets Yuuki Sakurai said, “If Sharp fails, there will be a lot of job losses, including those at suppliers, and the impact of that can’t be ignored.” Sharp recoded their worst decline of 77% this year with their shares falling by 6.7%. Lack of innovation to counter products from Samsung and Apple forced the company to shut down a number of their factories and fire its employees. The only viable way forward for Sharp is to increase their capital. With the deterioration of the electronic industry, there are rumors that Renesas Electronic Corp may also be taken over by another group led by INCJ in November. With the government facing so many industries in need of resources, it may prove more difficult to bail out Sharp.

Japanese Tech Firms in Trouble

The price of Sharp’s debt implies a higher-than 90% probability of defaulting in five years. Not surprising, Sharp’s bonds are rated below investment grade. This follows their $5.6 billion loss reported last year that has casted doubt on its long term survival.

Sharp is just one of many Japanese electronics companies in similar situations. Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank said, “It won’t be easy for Japanese electronics companies to recover because the center of gravity in the industry is shifting to developing Asia.” Panasonic was forced to skip its annual dividends after predicting their biggest loss in history, estimated at $9.28 billion. This result prompted Standard and Poor’s to reduce the Panasonic’s debt rating to BBB. Koji Toda said, “Japanese electronics makers have lost superiority because they are competing in markets where the advantage goes to whoever can mass-produce products at cheaper prices.”

Hopefully Sharp is not foreshadowing for other Japanese technology firms. “From the market’s perspective, Sharp is in extreme danger of going out of business,” said Taketoshi Tsuchiya. According to Bloomberg data Sharp will have to pay back $6.86 billion in 2013 and $1.58 billion in 2014. Sharp is negotiating with Google (GOOG), Microsoft (MSFT), and Apple, for a partnership.

Global or Japanese?

Panasonic and Sony are Japanese stocks. Japanese retail investors are fearful of stock market crashes and price stocks to price-to-book discounts.

This may be an opportunity for global investors. Yes, government debt/GDP ratios and demographics are terrible for Japan. These stocks generate revenues (and ideally would generate earnings) derived from multiple countries outside of Japan. Global multinational corporations can be purchased cheaply merely because their corporate headquarters are located in Japan. Outside of property right or legal issues, the macroeconomic forecast for Japan does not rule out investment in Japanese-domiciled stocks any more than it would for Intel (NASDAQ: INTC) or Apple.

Valuation Considerations

The following technology companies were compiled for Panasonic and Sony and other notable tech companies outside of Japan:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Country</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> </tr> <tr> <td> <p>HPQ</p> </td> <td> <p>Hewlett-Packard</p> </td> <td> <p>USA</p> </td> <td> <p>-</p> </td> <td> <p>0.2</p> </td> <td> <p>0.77</p> </td> <td> <p>6.61</p> </td> </tr> <tr> <td> <p>INTC</p> </td> <td> <p>Intel</p> </td> <td> <p>USA</p> </td> <td> <p>8.61</p> </td> <td> <p>1.83</p> </td> <td> <p>2.00</p> </td> <td> <p>30.15</p> </td> </tr> <tr> <td> <p>NOK</p> </td> <td> <p>Nokia</p> </td> <td> <p>Finland</p> </td> <td> <p>-</p> </td> <td> <p>0.33</p> </td> <td> <p>1.34</p> </td> <td> <p>-</p> </td> </tr> <tr> <td> <p>PC</p> </td> <td> <p>Panasonic</p> </td> <td> <p>Japan</p> </td> <td> <p>-</p> </td> <td> <p>0.13</p> </td> <td> <p>0.77</p> </td> <td> <p>-</p> </td> </tr> <tr> <td> <p>SNE</p> </td> <td> <p>Sony</p> </td> <td> <p>Japan</p> </td> <td> <p>-</p> </td> <td> <p>0.13</p> </td> <td> <p>0.43</p> </td> <td> <p>18.</p> </td> </tr> </tbody> </table>

On a price-to-sales and price-to-book basis both Panasonic and Sony are cheaper based on valuation than many non-Japanese turnaround plays like Intel and Nokia. Of these firms, investors should consider Sony, given its meaningful changes towards a new strategy.

This would be a very speculative bet. For American investors, Intel is less speculative but still cheap based on valuation. Investors seeking more stability should consider Intel before reviewing the more speculative Sony.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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