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Equities

Sony may be on the cusp of stock price revival

Conglomerate well-positioned to keep up pre-earnings rally where others failed

A strong showing by the newest "Spider-Man" movie would likely give a boost to a PlayStation 4 game due out in 2018.   © Marvel Studios 2017. 2017 CTMG. All Rights Reserved.

TOKYO -- As healthy earnings results continue to go unrewarded in Japan's stock market, observers are looking to Sony to buck the trend and provide a new direction.

The electronics and entertainment giant is believed to be off to a strong start this fiscal year. Group operating profit is seen topping 100 billion yen ($905 million) for the first time in a decade for the April-June quarter, up from the year-earlier 56.1 billion yen, thanks to brisk sales of smartphone image sensors, 4K televisions and digital cameras. This would put the company on track toward its first record profit in 20 years.

Markets have priced in these expectations. Sony shares touched a year-to-date high of 4,616 yen Thursday and stayed high Monday. The lofty valuation has prompted concern that the earnings announcement will trigger a temporary sell-off as investors run out of incentives to trade on.

But the stock could avoid the fate of other big names, such as Tokyo Electron, Fanuc and Shin-Etsu Chemical, whose shares have been sold off despite the release of favorable April-June results.

Green shoots

For one, Sony's game business is showing positive signs. The segment had given investors fresh cause for concern in April, when the company released fiscal 2016 earnings suggesting that sales of the PlayStation 4 console had plateaued.

"I'd thought profits would peak this fiscal year, but now I think further growth is likely," said Masaru Sugiyama of Goldman Sachs Japan.

Games in which Sony itself has a hand, which tend to offer fat margins, will probably play a role. These include a title due out next year based on the "Spider-Man" franchise. Key to its prospects will be the performance of "Spider-Man: Homecoming" at the box office. The movie's strong showing so far since opening in July suggests higher odds of the game's success.

Sony was at one point surpassed in market capitalization by Nintendo, which has been buoyed by the success of the Switch hybrid console. But the PlayStation's devoted fan base means the two companies are unlikely to fight much over the same customers. A Sony executive even remarked that the Switch could be good news for the company if it gives the broader video game market a shot in the arm.

Sony's market cap has since overtaken Nintendo's again, with the gap reaching 430 billion yen based on Monday's closing prices.

A safer bet

Exchange rates will also probably work in Sony's favor. With American long-term interest rates treading water, the possibility that a widening interest rate gap between the U.S. and Japan could push the yen lower against the dollar is looking less likely. The yen is hovering around 110 to the greenback.

Each 1 yen appreciation by the Japanese currency against the dollar boosts Sony's annual operating profit by 3.5 billion yen. With future currency trends still unclear, investors may find it easier to opt for Sony than such other companies as automakers, whose profits rely heavily on a soft yen.

Sony's involvement in businesses prone to fluctuating demand, such as image sensors, means the risk remains that earnings could nose-dive. But a look at the results of major electronic parts makers suggests that demand for smartphone components remains strong for now.

A QUICK Consensus survey of analysts pegged Sony's April-June operating profit at 133 billion yen. Whether earnings beat this estimate will offer the first clue as to how the shares will move.

Despite earnings heading toward record territory, Sony's market capitalization sits at less than half the 2000 peak. Even after accounting for inflated valuations during the technology bubble, this is not good enough for investors familiar with the Sony of old. But if the stock makes it past Tuesday's earnings release unscathed, the venerable conglomerate could find itself riding high once more.

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