How Sony Can Keep the Momentum

After the consumer-electronics giant reported record earnings, BW asked analysts what Howard Stringer and Co. should focus on next

by Kenji Hall

Japan's electronics giant Sony CFO Nobuyuki Oneda announces the company's third quarter financial result. Sony said its third-quarter net profit jumped by 25 percent to a record high. YOSHIKAZU TSUNO/AFP/Getty Images

When Sony (SNE) released its third-quarter earnings Jan. 31, investors had plenty to be ecstatic about. Analysts had been predicting that Sony Chief Finance Officer Nobuyuki Oneda would declare the yearend holidays as the company's most profitable quarter ever, and Oneda didn't disappoint. October-to-December revenues and net profit were record highs, he told journalists in Tokyo.

The period highlighted, once again, how far Sony has come (BusinessWeek.com, 1/8/08) since Chairman and CEO Howard Stringer took over in mid-2005. Back then, Stringer and Co. laid out specific profit targets and promised to snip away at units that weren't vital to the company's consumer-electronics and digital entertainment businesses.

Time for New Goals

Most analysts think Sony will meet nearly every target on time. The one Sony says it may not reach: an operating profit margin of 5%. That's unlikely after the company's downward revision of its full-year operating profit forecast to $3.85 billion, 9% lower than its previous prediction of $4.2 billion. It blamed the yen's rise and stock market's swoon over the U.S. subprime mortgage mess.

But the revision wasn't entirely unexpected, and many analysts feel Stringer and Co. now need to consider setting the bar higher. The question is, what should Stringer's new goals be? BusinessWeek asked financial and tech-sector analysts to jot down a few things they want Stringer's management team to accomplish over the next three years. Some common themes: innovate like Apple (APPL), manage the financial books like Matsushita Electric Industrial (MC) (soon to be renamed Panasonic), and make the gaming business profitable as fast as possible. Here's a more detailed look at what analysts want to see from Sony.

Boost return on equity. Sony should aim for a return on equity of between 10% and 15%, says Kota Ezawa, of NikkoCitigroup. ROE gauges how much profit a company is making with the money it has raised from shareholders, and Ezawa and many other analysts prefer it over profit-margin targets because it shows them how a company measures up against others in the industry. Ezawa also says Stringer's team should decide whether to buy or bail out of Sony-Ericsson, the successful cell-phone venture that's 50-50 owned with Sweden's Ericsson, and examine the possibility of selling the 60% stake in Sony Financial Holdings it held onto after the IPO last year.

Learn from the Vaio. Sony should raise its return on capital to 6%, a 20-year high, from the current 4%, says Yuji Fujimori at Goldman Sachs (GS). One obstacle: Too much product inventory has hurt the company's cash flow and held back the unprofitable TV business, says Fujimori. According to Goldman Sachs' research, Sony's TV inventory levels are around 10 weeks, but the industry norm is four to eight weeks. Indeed, there was so much extra stock over the Christmas holiday that Sony ended up promoting both new and old flat-panel liquid-crystal-display TVs. Sony has to transfer the best practices of the Vaio business to TVs, Fujimori says. Sony's Vaio PC business is a model of supply chain management.