Panasonic in trouble: second-highest loss in history

[Chad Wentworth]

Panasonic Corp. (6752), Japan’s third- biggest employer, eliminated almost 39,000 jobs in the past year, and its chief financial officer said the TV maker doesn’t plan another round of cuts. Investors say it has to.

Even after reducing its workforce by about 11 percent -- almost double the reductions at Sony Corp. (6758) and Sharp (6753) Corp. combined -- Panasonic will post a 765 billion-yen ($9.6 billion) loss in the year ending March 31, the company said yesterday. Panasonic plunged the most in at least 38 years in Tokyo trading today, making it the biggest percentage loser in the MSCI Asia- Pacific Index (MXAP), and Moody’s Investors Service said it will review the company’s debt for a potential downgrade.

“They have to cut, cut, cut,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $300 million in assets. “They’re not doing it fast enough. You have to be lean and mean.”

The projected second-highest loss in Panasonic’s history prompted the Osaka-based company to skip a dividend for the first time since 1950 because of an “urgent need” to improve its financial position.

The loss forecast, 30 times bigger than analysts estimated, illustrates how Japanese consumer-electronics companies are failing to come up with hit products to challenge Samsung Electronics Co. (005930) and Apple Inc. (AAPL) Sony, Panasonic and Sharp are valued at near three-decade lows as investors remain unconvinced Japan’s three largest TV makers know how to rebound from slumping demand, falling prices and mounting losses.
Sony Falls

Sony, Japan’s biggest TV maker, declined as much as 5.1 percent while Sharp, the nation’s largest maker of liquid- crystal displays, dropped as much as 3.5 percent. Both companies are scheduled to report second-quarter earnings at 3 p.m. today. Panasonic dropped by the daily-limit 100 yen to as low as 414 yen and changed hands at 419 yen as of 1:05 p.m.

The bulk of Panasonic’s projected loss for the year ending in March will come from 440 billion yen of restructuring expenses, more than 10 times greater than what the company projected earlier. That includes a writedown of goodwill on businesses such as solar, lithium-ion batteries and mobile phones, the company said.

“The situation is worse than we had expected earlier, and we have a severe outlook for the second half,” Chief Financial Officer Hideaki Kawai told reporters. “Digital consumer businesses such as TV, cameras, Blu-ray disc players and PCs worsened faster than we had expected three months ago.”

Panasonic has no plan to cut jobs in significant numbers, he said.
Debt Cost

With 321,896 workers on its payroll as of Sept. 30, Panasonic trails Toyota Motor Corp. (7203)’s 328,762 workers as of June 30 and Hitachi Ltd. (6501)’s 327,325 as of Sept. 30, according to data compiled by Bloomberg.

“Cutting jobs would be the path the company has to take,” said Makoto Sengoku, a Tokyo-based market analyst at Tokai Tokyo Securities Co. “It would be good if we knew that Panasonic had considered all the negative scenarios.”

The cost to insure Panasonic debt against nonpayment for five years jumped 20 percent, or 64 basis points, to a record 380.68 yesterday, according to prices from data provider CMA.

Trading of options to protect against Panasonic losses spiked to a seven-year high on Oct. 30, according to data compiled by Bloomberg. The put options were the most-traded contracts in Tokyo on the day.
Balance-Sheet Damage

The extra yield investors demand to own Panasonic’s 150 billion yen of 1.081 percent notes due 2018 rather than government debt jumped 19.4 basis points to a record 106.5 basis points yesterday, according to data from JS Price.

“The large expected net loss will damage its balance sheet significantly,” Moody’s said in a statement on Panasonic today. “Its gross debt remains high.”

The ratings company placed Panasonic’s Baa1-rated long-term senior unsecured bond and issuer ratings, as well as its shelf registration, on review for downgrade.

Japan Rating and Investment Information Inc. said it placed Panasonic on monitoring and may downgrade its current A+ rating by more than one level.

Sony has a market capitalization of $11.4 billion and Sharp, the maker of Aquos brand of TVs, is valued at $2.3 billion. In comparison, Suwon, South Korea-based Samsung, the world’s biggest TV maker, is valued at $175 billion and Apple, the maker of iPhones and iPads, has a market value of $560 billion.

Sony, the world’s third-largest TV maker, and Sharp, Japan’s third-largest maker of TVs, are both expected to cut their profit forecasts for the year when they report earnings today, according to analyst estimates compiled by Bloomberg.
Rating Cut

Sony’s net income may be 5 billion yen, compared with its 20 billion-yen forecast, and Sharp’s loss may be 296 billion yen, or 18 percent wider than it forecast, according to the estimates.

“These companies are too dependent on TVs, which have become commodities,” said Yuuki Sakurai, president of Fukoku Capital Management Inc. in Tokyo. “They need to find a way to shift away from TVs.”

Moody’s Investors Service lowered Panasonic’s long-term credit rating by two levels to Baa1 in September, citing weak earnings and higher debt. Panasonic’s cash and cash equivalents fell to 443.9 billion yen as of the end of September from 574.4 billion yen in March, according to the company.
Lost Ground

Sony, Panasonic and Sharp -- once symbols of Japan’s dominance in electronics -- have lost ground in TVs, phones and tablet computers to Apple, Samsung and LG Electronics Inc. (066570) The Japanese trio posted a combined 1.6 trillion-yen loss last year as global TV shipments declined last year for the first time since 2004, and a stronger yen hurt overseas sales.

Having the most advanced technology -- once a key strength of the Japanese companies -- matters less now. Consumers are increasingly paying attention to content and apps rather than hardware specifications. Sony has forecast a ninth consecutive year of losses from selling TVs while Panasonic has lost money in each of the past four years.

“This uncertainty is common for Japan’s tech sector,” said Kazuyuki Terao, chief investment officer of Allianz Global Investors Japan Co. (4689), which oversees about 250 billion euros ($324 billion) of assets globally. “We don’t see when bad news will stop coming out.”

http://www.bloomberg.com/news/2012-1...ring-cost.html