4 Reasons to Dump This Tech Stock
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Japanese electronics giant Panasonic (NASDAQOTH: PCRFY) has been suspect for years - not for verifiable wrongdoing, but because the increasingly poor business decisions of leadership have led to a plummet in value.
Kazuhiro Tsuga, who took over as Panasonic's leader almost a year ago, moved the company to a widespread scale back from popular items – items which might have saved it from this year long tumble - like mobile phones in emerging markets, solar panels, and rechargeable batteries.
Last quarter, it posted nearly a $9 billion loss—one of the largest ever by a Japanese company. I believe Panasonic investors should look to move into companies that are poised for growth, such as Samsung (NASDAQOTH: SSNLF).
Reason #1: Momentum
Much has been written on the power of momentum. Sadly, Panasonic’s momentum has a downward trajectory. Moody's Investors Service on Thursday said it has placed the company's credit rating under review for a possible downgrade. Its current rating on Panasonic's long-term debt is Baa1, three notches above non-investment, or "junk," territory.
Already mentioned were the orders issued by President Tsuga for the company’s new strategy. In order to compensate, in the last few months, Panasonic has cut nearly 10,000 jobs, on top of its laying off 36,000 employees in the previous fiscal year.
For examples of ‘who is doing it right’, investors can look to Cirrus Logic (NASDAQ: CRUS) or Aruba Networks (NASDAQ: ARUN). Cirrus is an integrated circuit components maker, supplying parts often found in TVs and tablets to companies such as Sony, Samsung, and Panasonic.
Last year, its revenue climbed 67% to nearly $370 million, driven by an all-time company high in audio product sales. Sales to clients in Asia also continued to climb for the third year in a row. Behind the scenes, the company boosted its spending on research and development for the third year in a row, and increased its engineering staff 26% to match.
Likewise, Aruba focuses on the growing market for wireless equipment. The company provides network access products and services for mobile enterprises on a global scale. Sales growth in the last 12 months were reported around 44%, and for the last three years, about 31%. Estimated earnings-per-share growth is at 25%.
Reason #2: Ethics
It was reported last week that a division of Panasonic is under investigation by U.S. authorities for allegedly paying overseas bribes to secure business contracts. Panasonic Avionics, a subsidiary that makes in-flight entertainment and communications systems for airlines, has received a subpoena for communications between company executives, consultants, and others that concern, “any benefits or gifts provided, or the payment of anything of value, by Panasonic or PAC to any airline employee or government officials."
Documents related to the probe reference the 1977 Foreign Corrupt Practices Act, which prohibits U.S. companies listed on U.S. stock exchanges from paying bribes to foreign government officials, and is enforced by the U.S. Department of Justice and the Securities and Exchange Commission.
This kind of press is not what companies want to have. It is much like the headlines a few weeks ago about the Chinese version of Skype intercepting the typed messages of users, and sending copies of them to its computer servers in the country. Beyond being bad press for Microsoft, which bought Skype in 2011, it renewed the flame of debate as to whether American tech companies should cooperate with Chinese authorities in monitoring the country’s citizens.
Microsoft stock seems to be relatively unaffected by the allegations, however, consumers and investors alike only take so much from a company when its name becomes synonymous with scandal and poor ethics before jumping ship.
Reason #3: Products
Panasonic’s decision to taper off products that are trending high in markets seem like a sabotage attempt by leadership. In a realignment of its business, Panasonic said it would cut in half the number of domestic production lines for rechargeable-battery cells, while focusing on non-consumer applications. The company said it wouldn't expand its investment in a solar-panel factory in Malaysia as planned.
It also plans to halt sales of smartphones in Europe this fiscal year, a market which it only re-entered last year. Finally, the company is also stopping production of its popular line of liquid-crystal-display panels for TV’s in several of its plants.
Alternatively, other companies are giving consumers what they want, particularly mobile phones. Apple and Samsung make up almost 50% of all smartphone units shipped and see no signs of stopping. Samsung has rolled out entire product lines, each tailored to a particular market niche. Coupled with its massive marketing budget and smart implementation of ads and roll outs, the company is inching upwards for the past two weeks.
Samsung is also following the tablet trend. It’s popular Galaxy Note, a smartphone-tablet hybrid, sold over 10 million upon roll out and an additional 5 million on its updated version a few months later. Samsung is exceptional at taking user and reviewer feedback into account when preparing to deliver new software and device updates. What's more, this update usually has a quick turnaround time.
Reason #4: Leadership and direction
Tsuga seems to have tunnel vision when it comes to strategy, only seeing the ‘doom and gloom’ without planning how to move past it. There are many examples of other leaders who lead their company to being the standard for technology industry innovation. Even if innovation isn’t the main driving force behind growth, those that stay in step with market trends are able to succeed and reward investors with a good return.
The mobile phone industry, in particular, has been characterized by fast-moving and quickly-changing product cycles. Companies must roll out updates and new products in order to maintain public interest. In order to do this, they need the steady-handed leadership that allows for quick decisions and even quicker implementation.
The bottom line
The television sets and other living-room electronics that once supported a thriving industry are now viewed as interchangeable by consumers. Panasonic can't match the manufacturing might or marketing dollars of Samsung, nor the brand recognition of companies like Sony or Apple. Investors should look to leave Panasonic and move toward these alternatives.
Bill Edson has no position in any stocks mentioned. The Motley Fool owns shares of Cirrus Logic. 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!