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Sony bulls look beyond hackings to lucrative turnaround

It may not be as far-fetched as the CIA dispatching a celebrity tabloid show host and his producer to assassinate North Korean dictator Kim Jong Un. Yet a 43 percent rally in the shares of money-losing Sony Corp. is pretty remarkable.

Sony has delivered a one-year return that’s on par with that of Apple Inc. and is one of the top performing stocks in Japan in 2014, easily beating gains of about 9 percent in Japan’s Nikkei 225 and Topix benchmark indexes.

This is the same Sony that’s forecasting to lose 230 billion yen ($1.9 billion) for the fiscal year that ends in March 2015. Sony Pictures Entertainment, meanwhile, has had sensitive corporate e-mails and film properties hacked and publicized, much to the embarrassment of top executives.

Even so, 65 percent of the Sony analysts tracked by Bloomberg continue to have buy ratings on the stock and have an average 12-month share-price estimate of 2,804 yen. That’s 9.5 percent higher than the stock’s Friday close.

“Although the Sony Pictures Entertainment leak was a big scandal in the news, from a financial performance perspective it is not that significant,” said Hideki Yasuda, an analyst at Ace Research Institute who has the equivalent of a buy recommendation on the stock.

Yasuda said Sony’s film business only accounts for about 20 billion yen to 30 billion yen of total operating income. He credits his bullish outlook to strong sales at the PlayStation 4 franchise, the company’s advanced image sensors used in smartphones, high-end digital cameras and the weaker yen.

“I am expecting there are a lot of other segments that are going to grow significantly in next fiscal year,” Yasuda said.

In recent weeks, Sony has been second-guessed by President Obama and lampooned on late-night comedy shows for its handling of the release of “The Interview,” a satirical film that the FBI believes to have triggered a cyber-attack by North Korea. Sony originally canceled the film’s release but reversed course and released it online and in more than 300 U.S. theaters.

While a restructuring push by Sony Chief Executive Officer Kazuo Hirai and his new Chief Financial Officer, Kenichiro Yoshida, has yet to restore the diversified consumer electronics and entertainment giant to financial health, analysts are optimistic it will.

Macquarie Group Ltd. analyst Damian Thong is forecasting 201 billion yen in net income for Sony in the fiscal year ending March 2016, and 236 billion yen two years after that.

Sony has taken steps to exit slow-growth businesses. In February, it announced plans to sell off its Vaio computer division to a Japanese investment fund. Another positive restructuring move, according to Jefferies Group analyst Atul Goyal, is the company’s move to sell its stake in a logistics subsidiary called SSCS-J to Mitsui-Soko Holdings Co.

Selling off more assets is still being discussed. E-mails released by hackers in recent weeks also show that the Sony CFO Yoshida raised questions in October about the future of the company’s music-publishing business, including a partnership with Michael Jackson’s estate that owns the Beatles catalog.

“I’d like to hear your thoughts on the Music Publishing business, which has a rather complex capital and governance structure and is impacted by the market shift to streaming,” Yoshida wrote in the message, released by the hackers who call themselves the Guardians of Peace.

Exiting non-core businesses and commodity consumer electronics could position Sony to earn 450 billion yen or more in operating profit, something it hasn’t achieved in the last decade, Goyal wrote in a Sony research note to clients on Dec. 10.

Reviving Sony’s big and unprofitable electronics division, which Goyal values at zero, remains a challenge. Sony is forecasting declining revenue over the next three years for its TV and camera businesses.

Yet, if the company can stabilize those businesses, the Sony bulls see the company’s PlayStation franchise, financial services division, image sensor business and film content powering earnings over the next three years.

Sony Pictures Entertainment won’t suffer any lasting damage from the bad publicity over the hack and handling of “The Interview” release, according to Yasuda at Ace Research.

“There are still people who will go to movies made by Sony,” Yasuda said. That business, he said, “will not suddenly disappear.”