Sony Needs to Make Hard Decisions: Fitch

NEW YORK (TheStreet) - It's time for Sony (SNE) to aggressively reform its products and rationalize its portfolio of businesses, according to bond rating agency Fitch Ratings, which continues to believe the prospect that the electronics giant remains in junk-rated territory for the foreseeable future.

>> Dan Loeb Takes on Sony In HBS-Caliber Restructuring

Fitch's comments after Sony forecast earlier in May it would lose JPY 50 billion for the fiscal the year ending in March 2015. Sony also forecast a 24 billion loss in the company's core non-financial businesses, mostly a result of restructuring charges.

In reaction to that weaker-than-anticipated guidance, Fitch said Sony's woes may continue into 2016 and made the point that further restructuring and a refresh of the company's electronics products are long overdue.

A price competitive consumer electronics marketplace and a saturated smartphone market mean profitability will remain low at Sony in fiscal 2016, Fitch stated.

Sony currently is focusing on cost reductions in the company's electronics distribution channels, its corporate headquarters, and an exit from unprofitable business lines, including personal computers. However, the company remains wedded to its loss-leading TV business and may not have the financial fodder to exit or restructure the business in its 2015 restructuring budget.

The Japanese-based Sony however, believes that a rise in 4K ultra-high definition TVs, especially ahead of the FIFA World Cup, may support TV profits. Fitch, however, is skeptical. Korean rivals such as Samsung, and LG, in addition to Chinese manufactures like Haier, Hisense and TCL are leading on both product and price.

"Fitch believes that more aggressive reform to revamp Sony's product and business portfolio is overdue. Persistent losses at its electronics business already invite unfavourable comparison to rivals like Panasonic Corporation (BBB-/Stable) and Sharp Corporation, which have recovered from heavy losses," wrote Kelvin Ho and Steve Durose of Fitch on Thursday.

Positive tailwinds like the devaluation of the Japanese Yen may either dissipate or turn to a headwind as macroeconomic winds in Japan shift, Fitch noted. The ratings agency said it could downgrade Sony if the company's earnings before interest and tax (EBIT) losses continue, or if funds flow from operations (FFO) rises to five times the company's net debt on a sustained basis.

Third Point

Activist investor Daniel Loeb has argued Sony should spin off its profitable Sony Entertainment business as a means to build the capital to restructure the company's electronics and TV businesses. So far, Sony has rebuffed Loeb's calls; however, patience may be running short CEO Kazuo Hirai's turnaround.

Sony shares were falling less than 1% to $16.41. Shares have fallen over 5% year-to-date and nearly 20% in the past 12-months.

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>> Dan Loeb Takes on Sony In HBS-Caliber Restructuring

-- Written by Antoine Gara in New York.

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