SHARP CORP’s RECORD FISCAL YEAR

[Anonymous]

Sharp Corp’s Record Fiscal Year
Results Illustrate Challenge of Expanding Profitability
Sharp
Corp’s  full fiscal year earnings (year-ended March 31, 2006) look
pretty nice at first glance and actually set new records for sales and
net income for the third consecutive year. Net income increased by
15.4% y-o-y, operating income +8.4%, and net sales +10.1%. Net income
per share came in at 80.85 yen versus 70.04 yen last fiscal year.
However, in order to make money you usually have to spend money and
spend is what Sharp did to the tune of a 10.5% increase y-o-y in COGS
and 9.1% in SG&A. The Japan Times reported that 148 billion yen of
219 billion yen (68.0%) in investments was allocated to LCD TVs, of
which sales increased 33.0% y-o-y.Sharp’s profitability growth was less
impressive where on a y-o-y basis Sharp maintained its 5.9% operating
margin and added 0.2% to its profit margin now at 3.2%. The Nikkei
Shimbun commented that although Sharp’s 5.9% operating margin is ahead
of an estimated 4.5% by rival Matsush*ta Electric Industrial (MC) it
lags Samsung’s 11.5% (Note: that figure was reported for the
quarter-ended this past March). Sharp’s operating income increase of
8.4% is respectable but a significant drop from the 20-30% level it
achieved from Mar. ‘03-Mar. ‘05. The Nikkei article points out the
obvious that intensifying competition is resulting in a huge CAPEX
necessity in order to not only meet demand but also to innovate ahead
of rivals while simultaneously reducing unit costs. Sharp remains
committed and announced it will focus on larger screen LCDs going
forward in order to boost margins (see its financial forecast for the
current fiscal year below).
As of the fiscal year ended March 31st,
Sharp had 299.47 billion yen (US$2.6b) in cash and cash equivalents, an
increase over last fiscal year by 1.5%.
Sharp’s forecast for the fiscal year ending March 31, 2007 is as follows (projected increase in parentheses):
    • Net sales: 3 trillion yen [US$26.1b] (+7.3%)
    • Operating income: 180 billion yen [US$1.57b] (+10.0%)
    • Net income: 100 billion yen [US$870m] (+13.0%)
    • EPS: 91.67 yen [US$0.80] (+13.4%)
    * I used a conversion rate of Y115/US$1 for convenience.
Sharp
said it will increase its year end dividend by 2 yen for a total of 12
yen, meaning its annual dividend for FY2005 will be 22 yen (including
the 10 yen interim dividend).Sharp’s ordinary shares  are up 1.5%
intra-day at 2,045 yen following the firm’s earnings release after
yesterday’s market close. With its revised year-end dividend Sharp has
a yield of 1.08%. Its TTM P/E is 25.3 versus the 28 to 29 it was before
its latest earnings release. Its forward P/E is 22.3.Sharp’s ADRs
gained 1.71% today to close at $17.80. Over the past year it has traded
between $13.40 and $19.70.I believe Sharp’s latest financials have
proven the company can remain profitable, generate cash and still
squeeze out growth in the face of huge CAPEX. With its new strategy of
focusing on larger screen LCDs there appears to be at least a 10% (to
13.4%) upside to its ordinary share price. For American investors this
upside could be even larger due to what will seemingly be a stronger
yen against the dollar for the remainder of the year on into 2007.

[Author]

May 10, 2006 at 10:50 AM