Investing in Sony Corporation (ADR) (SNE) With Dan Loeb

Recently, billionaire Dan Loeb, the famous hedge fund manager, has boosted his stake in Sony Corporation (ADR) (NYSE:SNE), from 64 million to around 70 million shares, via both direct ownership and cash-settle swaps, accounting for around 6.9% stake in the company. Since the beginning of the year, Sony Corporation (ADR) (NYSE:SNE) stock has increased 93.30%, beating the S&P 500’s return of only 13.30%. Let’s take a closer look to determine whether or not investors should follow Dan Loeb into Sony Corporation (ADR) (NYSE:SNE).

Two steps to unlock potential shareholders’ value

Sony Corporation (ADR) (NYSE:SNE) operates in many business segments including Consumer Products & Services, Professional, Device & Solutions, Pictures, Music, Financial Services and Sony Corporation (ADR) (NYSE:SNE) Mobile. Interestingly, the two biggest revenue contributors for Sony Corporation (ADR) (NYSE:SNE), Consumer Products & Services and Professional, Device & Solutions segment, were generating losses in 2012. The most consistent positive operating income businesses were Pictures, Music and Sony Mobile, contributing ¥34.1 billion ($341 million), ¥36.9 billion ($369 million) and ¥31.7 billion ($317 million), respectively, in operating profits.

Activist investor Dan Loeb is interested in Sony because he thought that the separation of the two businesses in Sony could unlock the potential shareholders’ value, driving the company’s share price much higher. He laid out two main important steps for value enhancement: first was to list Sony Entertainment; the second was to focus on industry-leading businesses for the future growth of Sony Electronics.

He mentioned that Sony should bring around 15% to 20% stake in Sony Entertainment public, so that the Sony Entertainment’s high profitability with good asset in TV and motion picture production could be recognized by the general market. In addition, Sony Entertainment’s management could have incentive to grow the business they manage.

Dan Loeb thought that Sony could issue the subscription right to current shareholders, not through a standard IPO or spinoff, to secure the best interest of Sony’s current investors. He said that he was ready to “backstop” the IPO with around $1.5 billion to $2 billion.

If Sony Entertainment could deliver the same margin with its U.S. peers, its EBITDA could experience an upside of around 50%. Sony is trading at $21.70 per share, with the total market cap of more than $21.9 billion. The market values Sony quite cheaply, at only 4.62 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization) and only 80% of its book value.

The cheapest price-to-book ratio valuation

Compared to its Japanese peers including Sharp Corporation (ADR) (OTCMKTS:SHCAY) and Panasonic Corporation (ADR) (OTCMKTS:PCRFY), Sony has the lowest price-to-book ratio among the three companies.