Japan Showing Signs of Life After the Quake

Japan Showing Signs of Life After the Quake

by Justin Dove, Investment U Research
Wednesday, June 22, 2011

The Great East Japan Earthquake shook up Japanese electronics manufacturers like Sony (NYSE: SNE), Hitachi (NYSE: HIT) and Panasonic (NYSE: PC) in March. And things haven’t turned around yet.

Sony’s stock is still reeling as it hit a 52-week low last week – a drop of more than 25 percent from its pre-quake price. Panasonic is down more than 10 percent and Hitachi is down approximately eight percent from their respective prices on March 10, 2011 – the day before the disaster.

Days after the first quake, we suggested that investing in Japan could be a good bet for the long term. What we didn’t know at the time was how long it would take to see signs of recovery. Judging by recent outlooks at some of these companies, we now have a better idea.

Post-Recovery Outlook for Sony, Hitachi and Panasonic

Projections aren’t always a solid indicator of future performance. It is, however, a good sign when various players have similar post-recovery outlooks for themselves and their sector.

Here are some key notes from Panasonic’s outlook:

• Panasonic projects that net income will take a 59-percent nosedive for the fiscal year due to the disaster, but there will still be a profit. The projection also calls for a net loss of 70 billion yen in the first half of the fiscal year, but a profitablesecond half.

• All of the facilities damaged in the disaster are operational to some extent, but Panasonic hopes they’ll be fully operational by the end of the year.

Some similar notes from Hitachi’s outlook:

• Hitachi also projected no profit for the first half of the fiscal year, but a dip of just 16 percent for the entire year ending March 31, 2012.

• Hitachi also returned operations to all facilities that were damaged in the disaster, but not at full scale.

Finally, Sony projects the following:

• Sony reported a large loss this past year ending in March, but mainly because of an issue with reporting tax-deferred assets. Net operating profits grew to almost 200 billion yen from 31 billion in 2010, and Sony expects similar numbers in 2012.

• Sony projects a 4.4-percent increase in sales and operating revenue, and a net income of 80 billion yen by the end of March 2012.

Most Japanese companies didn’t release projections in the spring because they couldn’t measure the scope of the disaster with accuracy. These recent outlooks provide a more accurate view of the year to come in Japan. All three remain optimistic, especially for the second half of the fiscal year (October to March).

Sony, Hitachi and Panasonic… Saved by Diversification

Sony and Panasonic are both trading below book value. This could always be a sign of some unforeseen weakness. Most likely it’s the uncertainty of Japan’s future and the supply chain disruptions caused by the disaster.

Known for televisions, Panasonic and Sony both claim it will be tough to turn a profit in that area. However, all three companies are diversified.

• Hitachi recently sold off its hard drive division to Western Digital (NYSE: WDC). It essentially went “all in” on the cloud computing revolution and even teamed up with Microsoft.

• Panasonic, which recently absorbed its unprofitable subsidiary Sanyo Electric Co., is going long on green and renewable energy sources.

• Sony still holds a strong brand despite recent cyber-attacks and is scheduled to release a next-generation portable gaming console by next spring.

You may want to wait and see what the summer brings, but judging by the outlooks, these Japanese companies are likely to rebound nicely by the end of the year.

Good investing,

Justin Dove