Japan’s assault on the yen has produced some clear winners: investors in the country’s beaten-up consumer electronics industry. Shares in Panasonic jumped 17 per cent on February 4 after the group reported a less-severe-than-expected quarterly loss. The hope is that stronger exports and recent cost-cutting will transform earnings. But with revenue still shrinking, the recent rally is largely based on hope.
Panasonic’s cost-cutting measures are clearly beginning to have an effect. Though revenue fell eight per cent year-on-year in the three months to December, the company reported an operating profit of 34.6 billion yen ($370 million), compared with an operating loss in the same period a year earlier. Sharp, an even more troubled rival, also managed to eke out a small operating profit.
Investors may hope that the weaker yen may boost demand from overseas while making Japanese products at home more attractive relative to pricier imports. Any improvement in sales would have an immediate effect on the bottom line: high costs and an inflexible workforce means that Japanese companies have the highest operating leverage in the world, according to Deutsche Bank. That helps explain why Thomson Reuters’ Japanese electronics index is up almost 70 per cent since mid-November.
Yet the revival remains uncertain. Almost every one of Panasonic’s divisions generated less revenue in the final nine months of 2012 than in the same period of 2011. Lower export prices should help the group compete against rivals from South Korea and elsewhere.
However, grabbing back lost market share also requires the kind of innovation that has been largely absent from Japanese firms in recent years. It’s telling that both Panasonic and Sharp did not adjust their own forecasts of hefty losses for the year to March 2013. Sharp remains financially fragile, too, with 900 billion yen of debt maturing this year, according to Fitch Ratings, and just 164 billion yen of cash in the bank.
Valuations remain low. Panasonic’s market capitalisation is less than a quarter of the company’s forecast full-year revenue of 7.3 trillion yen, even after its recent bounce. Five years ago, its price-to-sales multiple was twice as high. But without a revenue revival it’s hard to justify a return to those days.