Shares of Sony Corporation (NYSE: SNE) declined on Wednesday as part of a wider market slump, but continued to trade near yearly highs after the company reported quarterly earnings that exceeded analysts’ expectations. Perhaps more critically, Sony’s Pictures division virtually broke even, reversing a trend in which the unit makes a loss in the fiscal first quarter.

 

Q1 Earnings Summary

  • Earnings: $1.08 per share
  • Revenue: $17.5 billion
  • Sony Pictures Revenue: $1.7 billion

The Sony group posted annual revenues of $17.5 billion (¥1.93 trillion) for its fiscal first quarter ending June. Net profits came in at $1.38 billion (¥152 billion), which translated into per-share earnings of $1.08. Analysts had forecasts an EPS of $0.79.

Sony Pictures Entertainment, the company’s film production unit, generated a $68.3 million loss in the April-June period, a considerable improvement over the 2017 and 2018 first quarters. Theatrical revenues got a boost from titles such as Men In Black and The Intruder, among others. Lower theatrical advertising costs also helped the bottom line. Pictures revenues fell 14% year-over-year to $1.57 billion.

The company’s music division posted a strong revenue increase of 11.5% to $1.84 billion. Operating profits of the unit jumped to $348 million from $282 million.

Sony is coming off a record-breaking year for profit, earning $8.26 billion for fiscal 2018-19 on revenue of $78.1 billion. After issuing modest guidance for fiscal 2020, the company was forced to trim its revenue outlook.

 

Sony Stock Rises

Sony’s share price rose sharply in the aftermath of the earnings report. By Tuesday’s close, SNE stock had gained more than 4%. It backtracked slightly on Wednesday, although that was attributable to a sharp decline across the market following the Federal Reserve’s lukewarm policy decision.

Sony Share Price YTD - Aug 1 2019

Source: Yahoo Finance

SNE is still trading near its yearly high, but has underperformed technology and discretionary stocks in 2019. With the latest upsurge, SNE is trading within 6% of its 52-week peak. At current values, the company has a total market capitalization of $66.9 billion.

Sony has been described as one of the most undervalued large-cap stocks in the world by activist investor Daniel Loeb, whose Third Point Fund has acquired a $1.5 billion stake in the company. In June, Loeb sent Sony a proposal to drop its semiconductor business. Loeb has been trying for years to change the company’s direction and to address its apparent shortcomings.

Another area of interest for potential investors is Sony’s collaboration with Microsoft, which is centred on Azure. Sony is looking to trial cloud-computing technology to create a more immersive gaming experience for its Playstation users.

 

Conclusion

Looking ahead, Sony’s music segment is likely to become a rising star within the company thanks to streaming revenues and the consolidation of EMI Music Publishing. The semiconductor business is in a state of flux right now due to U.S.-China trade hostilities, so it remains to be seen whether Loeb’s latest corporate breakup proposal is warranted.

Disclaimer: Author holds no investment position in Sony at the time of writing.