Earnings Forecasts Lowered for Japanese Consumer Electronics; Sony Remains Top Pick

Based on weaker demand and the change in currency assumptions, we have updated our earnings forecasts for three consumer electronics companies, revising Panasonic Holdings’ fair value estimate to JPY 1,400 from JPY 1,450, and Casio Computer’s 6952 fair value estimate to JPY 1,650 from JPY 1,800. Sony Group’s fair value estimate per U.S. ADR is revised to $110 from $100 due to the stronger Japanese yen, while its fair value estimate per share is maintained at JPY 14,500. As indicated by the change in our fair value estimates, we believe that Casio is the most vulnerable to changes in the business environment, leading to the largest downward revision in its earnings forecast. On the other hand, Sony has been able to minimize the impact of the economic slowdown thanks to structural reforms implemented by current management. We believe that Sony is the most attractive of the three consumer electronics companies from a risk/reward perspective, although we believe that all three stocks are undervalued and have 20%-30% upside to their respective fair value estimates.

Despite the economic slowdown, Sony’s December-quarter operating income exceeded our expectations, mainly due to the electronic products and solutions segment maintaining a double-digit operating margin on the back of digital cameras and the game and network services segment improving its operating margin to 9.3% from 5.8% in the September quarter, due to the blockbuster success of God of War Ragnarok. In future, we expect Sony PlayStation 5 console shipments to improve as semiconductor supply constraints ease, driving margin expansion in the segment. We also expect solid growth in the image sensor business as demand for improved image quality in smartphone cameras remains strong. We slightly raise our forecast for Sony’s operating income for fiscal 2022 (ending March 2023) to JPY 1.19 trillion from JPY 1.17 trillion, and maintain the operating income forecast for 2023 at JPY 1.3 trillion.