Panasonic’s 4K Gamble Slightly Ahead of the Competition

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To say that Japan’s leading consumer electronics manufacturer Panasonic (NASDAQOTH: PCRFY) has been struggling in the past couple of years would be an understatement.  Having completely misread the market on consumer electronics trends it now finds itself in very dangerous territory. The rise of Apple and the South Korean duo Samsung and LG Electronics has brought with it the fall of several Japanese electronics giants such as Sharp, Canon and, in this case, Panasonic, which has already slashed its workforce by more than one fifth. At the recent Consumer Electronics Show 2013 held in Las Vegas, the company’s president Kazuhiro Tsuga hinted at a possible closure of business units in the future, without giving any specifications. In its last fiscal year for the 12 months ending March 2012, the company swung to an operating loss of $5.808 billion from an operating profit of $3.025 billion in the year before. Nothing at this point will alter another year of these kinds of losses.

For the current fiscal year 2013, Panasonic has downwardly revised its sales forecasts. Total annual revenues are now expected to drop from $87.219 billion to $81.1 billion while net losses will still be in the $8.50 billion range. Along with the job cuts, Tsuga is also aiming to close those business units that have an operating margin of less than 5% by the end of Q1 2016. So far, only the Appliances unit, out of the company’s seven divisions, has been able to consistently deliver more than a 5% margin.  If that doesn’t wake up both the vertical VP’s and the shareholders I’m not sure what will.

According to a Goldman Sachs analyst, Panasonic might need to spend more than $4 billion on restructuring. It is expected to clamp down on manufacturing of plasma panels, semiconductors, smartphones and batteries. Its Shanghai plant that manufactures plasma display panels is going to be shut down by the end of this year. According to Pocket-Lint, a separate decision to close a LCD panel facility in favor of OLED TVs and 4K tablet panels has already been made. Moreover, Panasonic has also admitted that their investment in 3D television has not paid off, a severe tactical error.

I believe a number of companies are going to be in a similar position as they continue to try to move the television forward.  The film industry is struggling with the same issues.  Greater ‘wow’ factors (3-D, smell-o-vision, etc) have always been pushed when ticket sales begin to lag indicating, frankly, a dearth of good ideas and storytellers and a market unimpressed with both. 

The company has smartly decided to jump into OLED as this is the future of television.  Wow factors like 3-D  are not what people really crave. Clarity and picture quality have always been the ultimate determiner of a good TV.  Sony made a lot of money selling Trinitron’s over the years, simply because the better picture was worth the premium price.  

Panasonic will re-purpose its LCD facility by preparing to launch two new and groundbreaking products that will be manufactured there: a 56” 4K OLED TV, the first of its kind, and  a gigantic 20” Microsoft (NASDAQ: MSFT) Windows-8 tablet that comes with a 4K Ultra-HD display. Recent reports also suggest that Panasonic’s production cost for OLED will be significantly lower as compared to its rivals. As for the 20-inch tablet, it is an amazing piece of hardware and has received glistening reviews. With a screen resolution of 3840x2560 pixels and a pixel density of 230ppi, it is almost as good as the iPad’s retina display, which boasts 264ppi. Both of these products were put for public display at CES 2013.  

With a strong Nikkei 225 and most of the bad news out of the way, Panasonic’s stock will likely receive a relatively strong bid below ¥600.  Huge companies like it are always given second chances by the market once it accepts reality and presents a new path forward.  Panasonic pushing back to the top of the technology curve in TVs and tablets is a step in the right direction.  Its brand image, however, is a commodity-level one in the U.S.  For a company that billed itself as always ‘slightly ahead of our times’ becoming a laggard will make the turn-around that much more difficult to sell

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Panasonic</strong></p> </td> <td> <p><strong>EWJ</strong></p> </td> </tr> <tr> <td> <p><strong>Stock Prev. 6mo</strong></p> </td> <td> <p>-4.97%</p> </td> <td> <p>8.25%</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>14</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>-7.26</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>1.96</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>0.81%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>-70.67%</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

 


PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. The Motley Fool is short Sony (ADR). 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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